Purchasing a rental property is a popular choice for many investors. The risks may be more acceptable to you than expanding your stock portfolio, and the rent you collect can help cover the costs of financing and maintaining the property. However, not all rental properties are created equal - and neither are your potential tenants. Choosing the wrong one can be an expensive mistake. However, if you do your homework before proceeding, you can minimize your risks and lower your stress.
Here are five things to consider before you proceed with purchasing a rental property.
1. Selecting Your Rental Property Location
Unless you are investing in a vacation home that you will be using, and renting short-term in between your visits, consider purchasing a property that is convenient for you to oversee, even if you don’t plan to do the maintenance.
2. Rental Property Maintenance
If you or your spouse don’t mind carrying out minor repairs, or if you’re determined to maximize your rental income, you can be a hands-on landlord or landlady. However, if this doesn’t appeal, consider hiring a property manager. In exchange for a set monthly fee, which usually ranges between 4 to 10% of the monthly rent, a property manager will prepare lease agreements, arrange repairs, collect rent, and screen prospective tenants. Be sure to sign a legal agreement with a property manager if you decide to hire one.
3. Rental Property Expenses
Since the rent you collect will increase your annual household income, your federal taxes will probably be affected. However, rental properties may also provide tax deductions, although these often change. You should always consult with a tax advisor prior to making any decision based on potential tax benefits.
Other expenses you’ll want to anticipate will include major and minor repairs, maintenance and rental property insurance (also called landlord insurance). And it’s always smart to keep funds available for an unforeseen major expense. For example, if a storm destroys the roof of your rental property, your insurance may require you to pay a deductible.
Interviewing and screening potential tenants can be tricky, especially if you’ve decided to manage the property yourself. Depending on your state, you can probably order background checks and credit reports online. Asking for references from past landlords can be helpful, too.
However, no matter how carefully you screen tenants, you’ll have to consider what you’ll need to do if rents are paid late (or not at all), your property is damaged, or other problems arise. Eviction guidelines vary by county and state, so it’s wise to review these. It never hurts to be prepared for a worst-case scenario.
5. Financing Your Rental Property
Stearns offers several mortgage loan options for financing your rental property purchase. Please contact a Stearns mortgage loan originator
in the city or state where you intend to purchase to discuss your financing options.
Get tips for screen tenants and being a landlord, landlord forms, landlord and tenant laws by state at www.american-apartment-owners-association.org
Jul 17, 2019