With the residential real estate market running on low inventory, you might be wondering if trying to find a single-family home or duplex to rent out is a good idea. Below are some things to think about to determine if this is a good time to invest.
- Evaluate your financial situation. Purchasing real estate, even for your own personal use, requires a significant upfront investment, including a down payment, closing costs, and ongoing expenses such as property taxes, insurance, maintenance, and repairs. Do you have the funds to put into additional properties without your primary residence and other daily needs suffering? Is your credit score strong enough for you to get a loan with a good interest rate?
- Consider your long-term goals. Rental property can increase in value over time and provide a steady stream of passive income through rental payments. If your goal is to build wealth through real estate, investing in rental property might help you reach those goals. Investing in real estate is not a good investment for those looking for quick returns or have a low tolerance for risk and should seek other investment options.
- How much time are you willing to put into management? Managing rental properties requires time, effort, and knowledge of such issues as tenant rights and other legal/financial issues. Do you want to take on the responsibility of finding tenants, dealing with maintenance issues, collecting rent, and handling legal and financial matters, or are you willing to pay a fee to a property maintenance company to handle these issues for you? If you have the skills or are willing to learn, dealing with these issues may be a rewarding experience for you.
- What is your local real estate market? This is one of the most critical issues to be considered, and it is not one that you have any control over. Do thorough research of the local real estate market to determine what the demand is for rental properties in the area you are considering. Job growth, population trends (college students, new families, retirees), and proximity to amenities (parks, stores, schools) can determine the demand for rental housing. Analyze rental rates and vacancy rates to estimate potential rental income and assess the profitability of your investment. This can be done by a search of classified ads or driving through neighborhoods you know to be mostly rentals. If you have friends or family renting in the area you are looking into purchasing real estate, ask them if they are satisfied with the condition of the apartment they are renting and the amenities they are getting for the price. If the market conditions are favorable and show potential for growth, owning rental property could be a lucrative opportunity.
- Risk assessment. Like any investment, rental property carries risks. Economic downturns, changes in housing regulations, property damage, and difficult tenants are some of the risks that come with owning rental property. It is important to have contingency plans and financial reserves to reduce these risks. Adequate insurance coverage is also not only crucial to protect your investment, but can protect you from lawsuits from your tenants should something happen to the property or them. If you have a solid plan in place to deal with the risks, the benefits to owning rental property can outweigh the risks.
- Evaluate your personal skills and strengths. To be a successful landlord, you must possess excellent communication skills, be able to negotiate disagreements, and be able to use excellent problem-solving skills quickly. You also must be able to address maintenance issues promptly and responsive to tenant concerns 24/7. Some knowledge of real estate laws and local regulations/ordinances is also beneficial. If you do not have these skills or are not willing to learn them, you may consider hiring a property management company.
- Remember the tax benefits. Owning rental property can provide tax benefits. Although rental income is taxable, mortgage interest, property taxes, maintenance expenses, and depreciation can be counted as tax deductions. Consult with a tax professional to understand the specific advantages and implications of owning rental property in your area.
With planning, owning rental property can be a major source of secondary income. By following the guidelines above, you can make an educated decision about whether purchasing rental property is a good decision for you at this time. If you do not possess all these skills or cannot meet these conditions at this point in your life, at least you know what you need to work towards to be a successful rental property owner. Whether you are unsure about the best course of action or ready to jump in, call Ellerbrake Group Real Estate and we will help you.
