As the cost of owning a home rises, it’s no surprise that the number of renters in the U.S. is also increasing. An estimated 43 million households rent instead of own. Millennials are leading that trend.
Younger people can’t afford to buy a home, right now. That makes this a prime time to be a property investor. If you can afford to buy rental properties, that is.
Owning investment property can be a game changer. It can take your income to a new level. If you know how to manage it.
But, it isn’t for everyone. Here’s what to know before you jump in.
8 Things to Know Before You Buy Rental Properties
Most people don’t realize what they’re getting when they invest in rental property. So, what seems like a dream come true can fast turn into a nightmare.
Take a minute to consider these important facts about owning a rental property. If you still think it’s right for you, then go for it!
1. It’s a Part-Time Job
Yes, you read that right. When you buy a rental property, you’re signing up for a time commitment. Exactly like a part-time job or owning a business.
It will need your attention each month. You’ll market, budget and lease it. And, that time adds up.
A good guideline is to invest 2 hours each week, which adds up to 8-10 hours a month. But, some months may be more time heavy.
The amount of time depends on a lot of things. Here’s a list of things that can increase your time investment.
- Property isn’t in good shape
- Tenants are difficult or needy
- Upgrades or renovations are happening
- Switching between tenants
- More expenses than income
- The property is/has been empty
- Legal issues
These are only a few things that can take more time from you. But, it doesn’t have to be a deal breaker. Making a schedule for dealing with your rental can help you manage time better.
2. You’ll Spend Money on Upkeep
Expect to reinvest some of the money you make back into the property. It will need general upkeep from wear and tear as you go through tenants. Painting, replacing old appliances, and servicing heating/cooling units are typical maintenance costs.
Nothing lasts forever. Roofing, flooring, and windows can add to the cost of upkeep over time, too. It’s best to set aside a percentage of your income to cover these costs before they happen.
3. You Know the 1% Rule
The 1% Rule is all about return on investment. You pay money into buying your rental. So, your rental needs to return money to you over the course of a year.
Here’s the rule:
The amount of rent you can get each month should be equal to or greater than 1% of the sale price of the home. If not, it’s not a good investment.
Think of your rental property as a business. This rule will help you buy investment properties that make money. You’ll need to do some market research to know if you’re getting a good deal.
Another thing that can detract from the 1% return is the condition of the property. That adds to the total investment.
Take into consideration any extra expenses you’ll need to invest in to get the property ready to rent. If it’s in terrible condition and price is too high, it may not be worth the investment.
4. You’ll Learn Marketing 101
It’s not only about having a great property to rent. You’ll also need to know how to get the attention of potential renters. Get ready to learn how to market your property.
Your competition can give you a good idea of what works. Do some research into other rentals in the area and see what they’re doing. Use it as a model or do it better if it isn’t working.
Narrow down your renter pool to a demographic you know would be great for your rental and the area. It’s a good idea to learn some social media marketing, too.
5. You Know the Neighborhood
It’s easier to manage a rental property in a neighborhood you know. You’ll know who to call if something goes wrong at your property. Especially, if you’re not living in the same area.
It also helps in the vetting process for potential renters. Schools, shopping and leisure activities are things you can share with your renters.
You want to choose people who would enjoy living there. It makes the owner/renter relationship much better.
6. You Need Great Insurance
There’s risk involved when someone else lives in a property you own. The background check might be great. But, you can’t know everything they do on your property or who else might be hanging around.
It’s not always someone’s fault. Accidents and bad weather happen, too.
Carry great insurance to protect yourself.
7. Tenants Expect Customer Service
Part of the beauty of being a renter is that you can call your landlord when things break. Your clients will expect you to handle it with grace. And so you should.
Being a landlord is a responsibility, so make sure you’re ready to put on a smile. If not, word will spread. You may find your rental empty more often than not.
8. You May Need Help
If you’re in over your head, know that there are ways to get help.
You can always hire a property manager to handle the majority of tenant and property issues. You’ll become a money manager for the property. It can reduce the time and attention you need to invest.
There are also options if you buy rental properties and it’s not working out. You can always sell your investment property and cash out.
Invest in Rental Properties, Today!
So, now that you know what you’re getting into, it’s time to decide! You can succeed when you buy rental properties. All you need to do is prepare yourself for the realities and work ahead.
Check out these finance articles for more game-changing ideas.