What You Should Know Before Buying a Rental Property

If you want to improve your investment portfolio, generate more monthly revenue, and increase your chances of accumulating wealth, one of the best strategies available to you is investing in rental property. The idea is simple: buy a property, attract tenants, and collect rent in excess of your ongoing expenses. You’ll generate monthly income and set yourself up for a profitable property sale in the future.

But before you get too excited about this potentially lucrative strategy, there are some important aspects to consider.

Your Choice in Property Matters

First, you need to recognize that your choice in property matters. Not all properties are going to grant you an equal opportunity for rental success.

Consider these variables:

  •         Neighborhood. One of the most important considerations will be the neighborhood where your property resides. Where is it located? Is it near plenty of employment opportunities? Is it easy to travel to and from this location? What are the crime rates? Are there good schools nearby? Is this a beautiful and inviting neighborhood?
  •         Age. You’ll also want to think about the age of the home. Older properties do carry some appeal; they tend to have structural and aesthetic features that can’t be replicated with newer homes. However, newer properties tend to be more appealing to tenants, and they tend to be much lower maintenance, ultimately resulting in higher profitability.
  •         Tenant appeal. What will your prospective tenants think of this property? Tenants love properties that are beautiful, clean, and convenient. Try to offer them renovated fixtures, high curb appeal, and everything they need to live a good life.
  •         Initial cost. It’s possible to pay too much even for a “perfect” rental property. Pay attention to property prices in the area, including the projected future prices of these properties, and don’t hesitate to pass on a home that’s overvalued.
  •         Appreciation potential. How are this neighborhood and this home poised for future growth? Do you believe there’s a good chance your investment will appreciate it?

Managing a Property Takes Time

While managing a rental property is often touted as a “passive” income source, the reality is, property management takes a lot of time and effort. That’s why many investors hire a property management company to help them with their responsibilities.

These are just some of the things you’ll be responsible for, as a landlord:

  •         Tenant screening. You’ll have to make sure you have creditworthy renters who can pay their rent on time and consistently, for as long as possible.
  •         Rent collection. It’s also important to actually collect rent. Online platforms can make this simpler, but you’ll still need to follow up on any missed payments.
  •         Maintenance and repairs. Inevitably, things will go wrong at your property. You’ll be the one responsible for conducting maintenance and issuing repairs. Sometimes, this can be both costly and time-consuming.
  •         Renovations. Occasionally, you’ll want to renovate the property—especially if you’re buying an old or unfinished property. That means investing a lot of time and money into making the property better for tenants.
  •         Marketing and advertising. When one tenant leaves, you’ll have to handle the marketing and advertising; otherwise, you’ll be stuck with a prolonged vacancy that costs you money.
  •         Legal issues. Though not common, landlords sometimes run into legal issues. There’s a chance you’ll have to deal with a tenant eviction or face a lawsuit from a tenant.

Success Isn’t Guaranteed

Though we’ve hinted at this idea in previous sections, it bears repeating: your success as a rental property investor isn’t guaranteed. There are too many things that can go wrong. For example, you could choose the wrong property. You could get unlucky and suffer from the effects of a deteriorating neighborhood. You could struggle to fill your property with tenants. You could deal with a bad structural problem. You could even face the consequences of a destructive or problematic tenant.

Even with the best intentions and ample knowledge, rental property investment comes with risk. Be prepared for that.

Diversification Is Still Important

You’ve likely heard about the importance of diversifying your portfolio, and it definitely applies to property investment. Buying and managing rental properties can be valuable, but it’s best used as one part of your overall financial strategy. 

Balance your risk and increase your potential gains by mixing in other types of investments, like stocks, bonds, and other sources of passive income. You can also diversify your rental property portfolio, specifically, by buying and managing different types of properties in different neighborhoods.

Buying a rental property isn’t an instant gateway to wealth and success, but if handled properly, it can greatly improve your investment portfolio and your overall financial position. Keep these important considerations in mind if you choose to move forward with this strategy.

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