5 Things You Should Know About Buying a Rental Property

Rental properties are an excellent avenue for acquiring wealth and (somewhat) passive income. There is a good reason that so many people use them as an investment tool and a means of setting up their future. As with any investment, there are considerations to account for when deciding if they are right for you. Just because it works (or doesn’t work) for someone else, doesn’t mean the same for you.

The loans are different from your primary residence.

When you buy a rental home, your loan type will change and your rate will typically be higher than if you were buying it as your primary residence. Take this into consideration when planning out your finances and what your monthly payment will be. You will also not be able to participate in owner-occupied only loans like FHA or VA.

2. Your minimum down payment will be higher than that of a primary residence purchase.

Low down payment programs are mostly reserved for a house that you will occupy and not use for rental income. If you are looking to buy a rental property, expect to put down at least 15% depending on the loan you choose. It is more typical to put down somewhere between 20 and 25%, especially if you don’t have excellent credit. Lending guidelines will also restrict how many loans you can have out at a time. So if you are looking to have multiple homes financed at once, review your strategy with your lender and make sure it is a possibility.

3. There are a lot of legal points to understand as a landlord.

It may be a good idea to look for a reputable and professional management company too, at the very least, help you with screening and filling your vacancy to make sure you comply with rules and regulations. You also have legal responsibilities as a landlord to keep the home up to code, safe and habitable for your tenants. Issues must be dealt with promptly and you must be available for any problems that come up. This is another reason to consider a competent management company who will take care of issues that crop up for you and help keep you in compliance.

4. You need to have a contingency fund.

If there is a problem at the property you own, you can’t just tell your tenants “Sorry, I can’t afford to fix the leaking gas oven.” You have to be able to handle issues quickly, which means paying for repairs. If you can not afford to maintain the home, it is not a good time to buy a rental. It doesn’t mean never, just not until you have emergency savings specifically for your rental.

5. Expect to have costs and vacancies in between renters.

In between renters, you will likely need to paint, have carpets or flooring cleaned or replaced, and fix anything else that you notice at the time. Rules vary from state to state, but there are rules dictating what a renters deposit may be kept for and under what circumstances. Expect to come out of pocket so you are not surprised. Making money with real estate requires upkeep and care of the property to ensure it keeps producing.

These points are not made to discourage you from purchasing a rental property. In fact, it is just the opposite. Owning rental properties can be an amazing way to build your financial health and create more income that can extend into your retirement. It can help diversify your investments and help fund your retirement and life in general. However, in order for a rental property to be a sound financial investment, it is important to consider the time, maintenance and cost it will take to do so. So before you buy, be sure to be in a solid position to do so.