Real estate investing can be a great business? However, many people think becoming a landlord is easy, you purchase a house and have the tenant pay you every month. Not quite.
Real estate can be a great investment, but it can also be a poor investment. Just like purchasing stock, it’s important to buy the right property.
But the right property is just part of the equation! You also need the right tenant, and the numbers have to work. Here is the big picture overview of things you’ll need to consider if you’re looking into real estate investing.
Consider these factors when choosing rental property:
1. The Location
The neighborhood influences the cost of the property, type of tenant, vacancy rate, rent, and the likelihood of experiencing any appreciation.
2. Property Taxes
It’s difficult to predict what the property taxes will be on any individual piece of property. They can be much higher or much lower than expected. Be sure to verify the property tax information.
Property in better school districts appeals to tenants with children. Rents will be higher in these areas.
Be sure you understand just how much it will cost to make repairs now and in the future. How much longer will the roof, furnace, and air conditioning unit last? How is the exterior? Expect to paint the interior and have the carpets cleaned every time you have a new tenant. Budget for unexpected repairs – this is where a home warranty can help out.
5. Property Cost & Rent Expected
At the end of the day, the cost of the property (routine maintenance, HOA, etc.) and the amount of rent you can expect to collect are the most important factors. If these numbers don’t work for you, nothing else matters.
Once you find an appealing property, use these tips to help you find the right tenants:
Check on your prospective tenant’s employment history. Does she change jobs every 6 months? Does he go for extended periods of time without a job? Can his current salary afford the rent?
2. Credit History
If a prospective tenant has done a poor job of paying her rent in the past, there’s a good chance she will continue to do so in the future. Be sure you know the credit history of everyone you consider allowing to live in your property.
Most of us have been around long enough to have a good feel for whether someone is a good person or not. Our intuition isn’t foolproof, but it’s far from worthless. When you’re talking to a potential renter, ask yourself if you would trust them. Do they seem to have their life together?
Ask yourself, “Do I believe this person will pay me on time for the next year?”
Some states make it extremely difficult to evict people, so choose your renters wisely.
The Financial Picture
In a nutshell, the principal components are
1. Rental Income
How much money will you collect each month in rent?
These are all the things that reduce your taxable income. Depreciation, insurance, repair costs, interest, home office, travel to and from the property, and other expenses can all reduce your tax burden.
This is the big picture to get you started. As you can see, there are many factors to consider before making the leap to becoming a landlord.
Be sure to educate yourself fully prior to purchasing your first rental property and look at this as a business, not a hobby. Being a landlord takes work and planning. Do your research first to see if real estate investing is for you!