Buying a rental property is a great way to start building wealth. Property values tend to appreciate over time, so you’ll earn more equity in your rental home as its value increases and also as you pay off the mortgage. Plus, you’ll get a stream of passive income in the form of rent.
But owning a rental property isn’t as easy as sitting back and collecting those sweet, sweet rent payments, and getting a mortgage to buy one isn’t as easy as getting a mortgage to buy a primary residence for yourself. Being a landlord is a lot of hard work, and a rental property will continue to cost you money the entire time you own it – even after the mortgage is paid off. Here’s how to tell if you’re ready to take the plunge into owning rental property.
You Understand the Costs Involved in Owning Rental Property
One of the primary drawbacks of owning rental property is that it’s expensive, not only to buy, but also to maintain. Landlord-tenant laws in your state will doubtless require you to keep the property in good repair and to perform emergency repairs quickly.
Generally, you can expect to put about half of the income your rental property generates right back into the property. In the form of insurance, taxes, brokerage, vacancy, and maintenance. You’ll need to be able to rent your property for at least one percent of the purchase price in order to recoup enough to pay the mortgage every month.
It’s vital that you choose a hot market to get your mortgage – Charlottesville, VA has a strong rental market, for example. You’ll also need to commit to saving a lot of each rent payment every month so that you can build up a slush fund to cover all the costs that come with owning a rental unit.
You Have Large Cash Reserves
You can’t get a low- or no-down-payment mortgage to buy a rental property – it just doesn’t work that way. You’ll need to put at least 20 percent down in order to get a loan to buy a rental property. Some lenders may even want you to put down 25 percent.
You may also have to buy two or three points on your mortgage to lower your interest rate. You’ll also need cash to cover inspection costs and closing costs on the loan.
Because the costs of owning a rental property are so high, though, you’ll need even more money in the bank to assure lenders that you’re ready to take on this responsibility. Save at least three (but preferably six or more) months’ worth of operating expenses.
You need enough to cover the mortgage for three to six months. Additionally two to three percent of the value of the property to cover routine maintenance and repairs. If you need to make renovations to the property to make it rentable, you’ll have to save money for that, too.
You’re Ready for the Responsibility of Being a Landlord
Being a landlord takes a lot of work. You’re responsible for keeping the property up to date and making timely repairs. If you’re not handy or don’t have a lot of free time to do repairs yourself then get it done from vendors.
This means that you’ll need a list of reliable, affordable professional contractors you can call on for everything from plumbing and electrical work to roof and gutter repairs and cleaning, window replacement, HVAC, landscaping, and more.
You’ll also need to find and vet tenants. That means running background checks on prospective renters and following up on their references. Many landlords use property management companies to handle most of the day-to-day responsibilities. Like finding and managing tenants and maintaining properties. It costs more money, but it might be worth it for all the work it takes off your shoulders.
How a Rental Property Will Fit into Your Financial Picture
You should treat a rental property just as you would any other best investment options in your portfolio. This means that you have a solid idea of how owning one will fit into your financial goals and the bigger picture of your finances over the long term. Perhaps you want to build wealth and buy more rental properties.
Maybe you’re looking for a property that you can use sometimes yourself as a vacation home. Maybe you’re looking to sell for a huge profit in 10 to 15 years’ time. Don’t invest in rental property until you feel confident that you know how the investment will further your financial and personal goals.
Conclusion
Buying a rental property is a big deal – it’s expensive to acquire a property and it’s expensive and often time-consuming to keep it. But it can also be the first step on your journey to much greater wealth and more stability. Just make sure you’re ready for the commitment and responsibility. Hope this topic on how to buy a rental property was useful to you. Are you ready to buy your first rental property?
