Although a good rental property stands to net you a significant amount of passive income, it’s important for first-time investors to understand the risks associated with property ownership. Simply assuming that your freshman foray into property investment will prove profitable may turn out to be a huge mistake on your end. So, before you start filling out paperwork, make sure to take the following factors into account.
How Much Demand is There?
Depending on where the property is based, there may not be much demand for rentals at the present time. One way to ascertain this is researching the average rental rates in a neighborhood, city or township in which the property is located. If rents appear to be on the low end, it’s generally a safe assumption that there isn’t much demand at the moment. This may make it difficult for you to charge your desired amount in rent, as potential tenants will have an abundance of more affordable options at their disposal. As such, it’s generally a good idea to avoid purchasing rental properties in areas where demand for rentals is waning.
How Much Will the Property Cost to Insure?
Anyone looking to insure a rental property should be advised that homeowners insurance can’t be applied to properties in which the owner doesn’t reside. Instead, you’ll need to purchase landlord insurance, which typically covers physical damage to the property and provides property owners with liability protection. For maximum safety, make a point of encouraging every tenant you take on to purchase renters insurance, as this will cover a number of areas to which landlord insurance cannot be applied.
How Much Work Does the Property Need?
As any experienced investor can attest, many rental properties are far from well-maintained. While you’re likely to find little problems in virtually every rental, some properties have issues that require a tremendous amount of time, manpower and capital to fix. Depending on how much work a property requires, fixing it up may ultimately cost you more than it stands to make you. For example, if the property in question is located in an area in which rentals are in low demand, pouring a small fortune into repairs may fail to facilitate your desired ROI. On the flipside, if the property in question is located in a popular, in-demand area, paying for the necessary repairs may prove to be well worth your while.
How Much Will the Property Cost to Maintain?
In order to keep a rental property in prime condition, you’ll need to make maintenance one of your top priorities. For example, if you’re investing in an apartment building, you may need to hire a dedicated maintenance staff to ensure that problems are addressed in a timely and professional manner. The more units this building or complex has, the more maintenance people you’ll need to bring on.
The age of a property should also be taken into account when calculating maintenance costs. Although there are certainly exceptions to the rule, older properties tend to require a higher degree of maintenance than ones that were built more recently.
Is This the Wisest Use of My Resources?
If you’re unable to find any rentals that are likely to generate your desired level of passive income, it’s worth asking yourself if this is truly the best use of your financial resources. After all, it’s entirely possible that there are no good investment opportunities in your current locale – especially if you reside in a smaller area with cheap rental rates. (Of course, this doesn’t mean you can’t expand your search to areas with more demand.) Additionally, if you intend to invest in real estate with your 401K or an IRA, consult someone with experience in property investment to determine whether this is a good idea.
Purchasing a well-maintained rental property in a desirable area can be a highly profitable venture. Unsurprisingly, the prospect of generating large amounts of passive income is too tempting for many fledgling investors to resist. Still, it needs to be understood that not all rental property represents a wise investment. Choosing a property located in an unpopular area or one that requires an exorbitant amount of work may ultimately cost you more than it stands to make you. As such, you should avoid jumping into any investment opportunities without first doing your homework. So, before you commit to purchasing a rental property, carefully consider the factors discussed above.