Some Considerations Before Buying a Rental Property

By Diana Palmieri

So you want to be a landlord, eh? Rental properties are hot these days, with lower home prices and lower mortgage rates. There are many considerations before you jump in.

  • Location. You always hear or see that “location, location, location” blurb within real estate advertisements. While this will apply to where you want your permanent residence to be, it is very important that your locale serves your future tenants and, of course, you. How far it is from shopping, the post office, schools, and so on, is important. Check out the rental listings in the neighborhood so you can have a competitive edge when it comes to pricing your rental. Also consider the distance from your house to the rental. It is far easier for you to do maintenance and yard work and monitor your tenants if you are close to the house.
  • A mortgage for your rental property will have different requirements than your primary mortgage. Usually the rates are higher and you will have to put a bigger down payment on the property. Also be aware that property taxes on nonowner-occupied rental properties can be higher as well.
  • How handy are you? Maintenance and repairs on homes can be very costly; if you are not handy, you need to consider the cost of having someone do maintenance and repairs for you. Landlord and tenant laws require you to make serious repairs quickly. Also consider what happens when you go away or have a family emergency and you’re not able to be around to maintain the property. There are property managers who, for a percentage of the rent you collect, can maintain the property on your behalf.
  • Have the appropriate amount of insurance. Your assets are at risk should an accident occur on your rental property. Consult with your homeowners agency to discuss what you need to protect yourself and family for damages and other factors out of your control. Remember, fires and pipes bursting won’t occur at times that are convenient!
  • Your bottom line. How much will you make off this property?  Will you break even for the first few years before profiting?  You will be building equity into the home as you are paying down the mortgage, so your investment may be a good one eventually.
  • Those deadbeat renters. Believe it or not, I feel this is one of the biggest risks. I have many friends who are landlords and have witnessed firsthand what damages a bad renter can do. FYI, laws in place in most states usually will side with the tenant. Some costly examples could be the fact you may not be able to evict a tenant in the winter or shut off the utilities for nonpayment. Make sure you know your state’s laws. Also consider physical damage tenants may do to your home may cost you hundreds to thousands of dollars in repair work, reducing your bottom line.
  • Contact your tax advisor. Ask about the potential tax savings (or not) on having a rental property.

If you decide that maybe being a landlord is not for you, perhaps consider investing in a Real Estate Investment Trust (REIT). Consult your financial advisor for more details about these types of products and see if they could be right for you.

REITs are subject to significant risks and suitability standards must be met. Investments are illiquid, may not meet its investment objectives, is subject to financial market risks, including interest rates, distributions are uncertain, and loss of principal may occur. Please read the applicable prospectus in order to fully understand all the implications and risks of the respective offering of the securities to which it relates.

 

Diana Palmieri is dually registered with Vanderbilt Securities LLC and H Beck Inc., which are unaffiliated. Securities offered through Vanderbilt Securities LLC, member SIPC/FINRA/MSRB.

 

Author

No posts to display