Things to Consider Before Buying a Rental Property
While a rental property can be an excellent source of long-term wealth, it can also become a headache-inducing money pit, especially if you have no idea what you’re getting into.
To help you on your journey towards real estate success, we’ve compiled a list of “must ask” questions. The list will help you gain more information on the property and its overall potential as an investment.
In case you don’t know the answer to some of the questions below, all you need to do is research – simply consult your real estate agent, get in touch with local appraisers, or search the Internet. The more information you have under your belt, the better your chances of success.
Location
The property’s location will determine important factors such as rental rates, vacancy, and caliber of tenant. You want the house occupied by a tenant who will take good care of it, and will pay the rents as scheduled – location plays a key role in all of this.
- How is the crime rate in the area?
- Is it in a convenient location? Are there nearby amenities such as walking/biking trails, schools, transit options, restaurants, parks?
- Is the home within a good school district?
- Are there more rental properties than owner-occupied properties in the area?
- How are the trends in property values for the past five years?
Investment Potential
Keep in mind that you’re after the property’s investment potential. Considering the potential income, possible expenses, and value of the initial purchase is a must. How these factors affect one another will determine whether you have a lucrative investment in your hands, or a money pit.
- Are both the mortgage payment and estimated expenses covered by the monthly rental income?
- How much do comparable properties in the neighborhood demand for rent?
- What expenses did the property incur over the past year?
- Will you be able to acquire profit and loss statements for the last three years?
- Do you have a copy of the current lease agreement? Did you check for any odd stipulations that may affect your income and/or expenses?
- How is the property’s rental history? When was it last vacant, and how long did it take before it was occupied by a new tenant?
Unexpected Expenses
Compared to typical owner-occupied homes, a rental home usually has more maintenance requirements. You need to be prepared to deal with large expenses from time to time, whether it’s a faulty air conditioner, a roof that needs replacement, plumbing issues, or other potential problems. Since this is an investment property, make sure you’re fully aware of all the possibilities before you buy.
- How is the HVAC unit’s condition?
- Are there any slanting or sagging portions of the floor area?
- Are there any signs of water damage in areas such as the kitchen, laundry room, or any of the bathrooms?
- Have you assessed the current condition of the exterior and the siding of the house?
- How is the roof’s condition?
If you want detailed answers to these questions, it’s best to hire a professional inspector. A professional will inspect the home and notify you of any serious problems before you close the deal, so you’ll know in case there are any deal breakers.