What You Should Know Before Buying a Rental Property
Purchasing a rental property can be an incredibly smart financial decision to grow your wealth and assets. Rental properties bring in additional income each month while appreciating in equity, which can pay off quickly as a rental property owner.
But before you jump into purchasing your first rental property, there are a few things to consider. We’ve listed out exactly what to know before buying a rental property so you can ensure you’re well-prepared.
Keep reading for five questions to ask yourself before investing in a rental property.
1. What Type of Rental Property Do You Want?
When it comes to investing in real estate, there are two main types you may be deciding between:
A single-family home is a standalone residence, meant to house just one family.
These are multi-unit properties, each unit may share common areas and spaces, examples include condominiums, apartments, and duplexes.
In addition to the type of rental property, you should also be thinking about whether you will offer short-term or long-term leases. The lease length will dictate how stable your tenants are, and therefore, how often you may have vacancies (see below for more info). This is an important factor to tie into the type of property you choose as a worthwhile, lucrative investment.
2. What Will Your Cash Flow Look Like?
Once you have decided on the type of rental property, you need to think about setting your rental price appropriately to ensure income is covering your expenses.
There are quite a few property expenses, so be sure to take into account the following:
- Monthly mortgage amount
- Monthly HOA dues
- Landscape upkeep
- Miscellaneous maintenance costs, repairs, etc.
Once you have the totals for each expense, determine which are your responsibility as the landlord, and which are the responsibility of your tenant. In doing your calculations, make sure the monthly rent will cover all landlord responsibilities, plus your desired profit.
Careful calculations are key to guaranteeing your monthly cash flow is positive, enabling you to generate a profit.
3. Can You Afford a Vacancy Period?
While the rental market changes every day, it is important to be prepared for a potential vacancy period. It may take months for a rental property to become occupied, and until your property is filled, you are responsible for all expenses including the mortgage payment. Although they definitely aren’t the best situation to be in as a landlord, they are common, so be prepared financially.
It is equally important to protect yourself within the terms of your lease agreement by requiring tenants to give notice to end the lease and vacate the property. Typically, this is anywhere from 30-90 days depending on the terms of your lease contract.
Putting in a clause that requires renters to pay a fee to break their lease early is in your best interest as well. This could provide you with some financial assistance if your tenants want to vacate the property before their lease term has expired.
4. How Will You Find Suitable Tenants?
Buying a rental property is one step, finding stable, responsible tenants is another. Not only are you looking for tenants who will take care of your property as if it were their own, but you also want to know they can pay their rent, on time, every time.
While many property owners post ads online for their newly available listing, doing so can bring in a stream of applicants, many of which may not be qualified. So how do you know which applicants are qualified to rent your property? A few questions you should consider asking include:
- Do you currently rent? If so, where? How long?
- Why are you looking to move?
- Will your current landlord give you a good reference?
- Have you ever been evicted?
- Have you ever filed for bankruptcy?
- What is your estimated monthly income?
- Is there anything I should know about before running a background check on adults who will be living on the property?
With these questions, you can uncover potential risks. It’s recommended to use a background check vendor to thoroughly vet the potential tenant’s credit and background before entering into a lease agreement.
5. How Will You Handle Property Management and Maintenance Checks?
Another important step is to determine how you will maintain and manage the tenants and their maintenance requests. If you have a multi-unit property, the maintenance requests could require the help of a property management company to handle these requests on your behalf.
We recommend retaining written requests to create a paper trail. This is a way of tracking your responsiveness in case there are any unforeseen issues or misunderstandings in landlord-tenant communications. It could be as simple as creating a form your tenant submits to report a problem or request a repair. From there, correspondence via email is the safest way to cover all of your bases and have a documented log of requests and ongoing communication.
Ready to Apply for an Investment Property Loan?
At OUCU Financial, our rental property loans offer a competitive edge, including variable and fixed-rate options, flexible terms, and loan amounts up to $7 million.
When you partner with OUCU Financial, you can leverage your rental property investment so it has what it needs to thrive in the current rental property market.
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