5 Questions To Answer Before Buying Your First Rental Property

While it’s very true that real estate investments can be lucrative … and provide a steady stream of ancillary income or increased net worth, or both, it’s not as easy as it looks.  The stakes are high, and real estate income is rarely “passive” income.

Here are 5 questions you should be able to answer before taking the leap into real estate investing.

What can you afford? Most rental properties require higher down payments. A good credit score, steady flow of income and strong financial standing can improve your interest rates and borrowing terms, but it’s important to be realistic about what a prudent investment should be in your specific situation. What can you really afford to buy? Tip — if you find properties in your local area beyond your financial grasp, consider shopping in other communities with lower costs of living.

What exactly are you buying? Is the property in a good neighborhood that is likely to hold its value?  Is the home in good condition or are you likely to be making major repairs in the near future (roofs, hvac units)? Unless you have an extensive construction background, it’s a good idea to hire a good home inspector, so you know what you’re getting into, before you do. The less comfortable you are making repairs and handling general upkeep, the better condition your property should be in.

What are you making? Take a sharp pencil to the numbers and be realistic about every aspect. You should know what current tenants (and other nearby rentals) are paying each month, as well as what the monthly expenses look like. Account for mortgage, utilities, property taxes and general maintenance costs, so that you truly understand what the net revenue figure looks like.

What is it costing? In addition to recurring costs, what happens if the property is vacant for a few months between renters? How much is your time worth? If you’re the person who will be making repairs, collecting rent, screening applicants, etc. it needs to be a good investment of your personal resources. Or you need to factor these additional costs for hiring others to do this work.

Why are you doing this? From a financial aspect, the 2 most common answers are “short-term cash flow” or “long-term increased net worth.” Your answer may play a hand in determining what type of property you purchase, especially since rental investment properties are generally harder to resell. From a lifestyle standpoint, if you are a hands-on landlord, be prepared for occasional late night calls to fix appliances and be willing to chase after delinquent tenants. Decide if this is a trade-off you (and family members) feel comfortable making.

This blog post from Team Move/OVM Financial does a good job of providing more tips on getting into the real estate investment business, including types of properties to consider, and options for financing them.