Five Things to Keep in Mind When Investing in a Rental Property

Investing in a Rental Property

While owning rental properties can be an excellent secondary source of income, it is not without risks. Make sure you weigh all the potential costs and benefits before committing to a second mortgage and all that it entails.

Expect increased property taxes. The tax codes in many states include homeowner’s exemptions and decreased tax rates for your primary residence. These caps on property taxes will not apply to your rental property, so be prepared for the increased tax burden when you look into adding a rental property to your real estate portfolio.

Be prepared for horror stories. While you hope to get conscientious renters, there is always the possibility that your tenants will trash the place or break the lease and move out without warning. The security deposit will only go so far. If the damage left is extensive, you may have to dip into your savings to make the place habitable for your next renters. Alternatively, good tenants are hard to find but worth it.

Once you have a good renter in place, keeping them there should be a priority. Consider this if you are thinking about raising the rent. If you have tenants that take care of the lawn and generally treat the home like it’s their own, the peace of mind in keeping them there might be worth the slight decrease in revenue.

Unexpected and expensive repairs are normal. On a related note, furnaces will go out, refrigerators will break, and roofs will need to be replaced. Plumbing problems will happen, and properties will need to be repainted. Make sure your rental prices take all of this into account. You should be able to save the excess rent money to pay for the inevitable repairs down the line, but you need to make sure you have a decently sized emergency fund before you even consider embarking on the journey to becoming a landlord.

Make sure your finances are in order. In addition to a healthy emergency fund, it is important that you make sure all high interest debt is paid off before you take on an additional mortgage. This is necessary in part because many mortgage brokers will not approve the second mortgage if you seem high risk, but it is also important from a personal finance standpoint.

If something unexpected happens and you lose your rental income, will you be able to single handedly cover the expenses for both your rental property and your primary residence? Make sure you include expenses such as HOA fees while you are considering your potential rental budget.

Consider a property management company. Many families move into a new home and choose to rent out their previous home instead of selling it. Since a lot of families move because of job relocations, this can easily result in a rental property that is a fair distance away from your primary residence. While it will cut into your bottom line, it can be worth the cost to pay a property management company to take care of the home while you are away.

Thinking about purchasing a short term rental property – whether for enjoyment or income? Learn more by connecting with our team of professionals today.