Is a Rental Property a Good Investment?

The price of real estate has skyrocketed over the past several years causing many first-time buyers to consider purchasing real estate in more affordable parts of the country. While this won’t be your primary residence now, it could be someday. If that’s important try to imagine where you’d want to live and the type of home you’d want t live in. 

What To Know About Buying Rental Property?

Real estate markets can shift so buying property in a suburb today might be a better investment than buying something in-town…even if you don’t see yourself living there one day. Try to separate out the investment from your dream home. If it works out, great! If not, and you’ve focused on finding a solid investment, you can always sell that property and use the proceeds to buy the home you want in the future.

You should also consider what type of property might interest you. Do you want to buy a property that might house one to four families. If you’re looking for a property with more than one unit, do you want a duplex, triplex or quadruplex?  Typically anything more than four units is considered commercial property and that may impact the type of financing you get.  In some situations, buying smaller properties might give you more options vs buying a building with 10 apartments. You’ll need to educate yourself in this area to understand how the type and size of the building can affect the financing available to you. 

Managing and Maintaining Your Rental Property

Once you’ve chosen the type of property, you need to focus on the location and how you will manage that property. 

Long distance or out-of-state investors will need some local help (a family member or a professional management company) in order to manage the rental property. The reason is that, they won’t have the ability to quickly get to the property to handle problems or rental issues. If you’re going to rely on friends and family, you’ll need to have the property be in close proximity to them. If the property is too far, they’re less likely to help. 

The duties your property manager should undertake may include 1) scheduling maintenance or repairs, 2) helping find new tenants, 3) collecting rent, or 4) simply driving by to make sure the home is well-cared for. If you hire a professional management company remember to factor that cost into your budget and do some hard due diligence online before signing any type of contractual agreement.   

Keeping the property rented is particularly important. Sure, there will be times when the property is vacant – and you’ll need to cover those times financially – but vacant property carries its own risks (make sure your insurance covers those vacancies). 

Financing Your Rental Property and Tax Implications

Investment properties typically command a higher interest rate for the loan, have higher loan fees and require a higher down payment (usually 20% of the purchase price). You’ll also want the person(s) who prepare your taxes to walk you through the state and federal income tax implications. (Filing in the state in which the property is located may be another expense).

You may want to hire a real estate attorney to guide you in the purchase (even if one isn’t typically used for a residential deal in that part of the country) and be sure to get input on the lease you’ll be using for your future tenants.

There are loads of resources about how to be a successful real estate investor. I am more than happy to talk to you about how to value rental property, the ins-and-outs of being a landlord as well as the mechanics of renting vs buying a property you intend to live in. If you decide you don’t mind being a landlord check out Bigger Pockets an online community for real estate investors. 

Should you decide to purchase out of state, I have a vast array of resources and connections to help you find a real estate agent who can work with to help you make this investment.

That’s a quick summary of some of the biggest issues you’ll face, but there are many others: insurance, repairs and 1031 tax-free exchanges. As always, feel free to contact me should you need professional advise on how to proceed.

 

Posted on September 10, 2019 at 9:28 am
Dietric Williams | Category: Education, Real Estate | Tagged , , , , ,

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