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Guest article by Katie Conroy of Advicemine.com
Three Essential Steps Before Buying Your First Rental Property
There are several financial benefits to investing in real estate, but there are risks as well. Problem tenants, prolonged vacancies, and unexpected home repairs can affect your cash flow and threaten the success of your major investment. Fortunately, you can avoid these risks by planning carefully, doing your research, and educating yourself about running a rental. As you familiarize yourself with real estate investing and search for your first property to purchase, don’t forget about these three important steps!
Get a Home Inspection
One essential thing to do before buying a property is to get a home inspection. Without a home inspection, you could wind up with expensive maintenance issues that threaten your rental profits. As Investopedia explains, you can usually back out of a sale if your home inspection reveals significant problems with the property. Alternatively, you can use the results of a home inspection to negotiate a better purchase price!
Your home inspector should inspect the entire building from top to bottom, including essential elements like the roof, foundation, plumbing, electrical, and HVAC system. Even seemingly small issues can be important. For instance, if the water heater is not functioning properly, it may need to be repaired or replaced, especially if it’s more than 10 years old or producing rusty water.
The cost to install a new water heater will depend on the type of unit you’re replacing. Home Advisor reports that standard tank water heaters cost an average of $889 to install while tankless heaters can cost you $3,000 with labor. It’s easy to see you’ll need to research the repair costs for any issues revealed in the inspection so you can decide if it’s still worthwhile to go through with the sale.
Lay the Financial Groundwork
Budgeting for an investment property is just as important as budgeting for your first home. But this time, you should have a real investment strategy in mind before making your big purchase. There are several different ways to make money with an investment property, including buy and holds, commercial real estate, and fix and flips. Before deciding on an investment strategy, research each option until you understand the financial pros and cons of each.
Not only should you budget for your property purchase, but for your ongoing expenses as well. Be ready to cover your monthly mortgage payments, insurance premiums, property management fees, taxes, and maintenance costs. Be prepared to cover these costs during vacancy periods when you’re not earning any rental income. Thankfully, most of your regular expenses are tax-deductible!
Know the Risks
Before you get involved in any big investment, make sure you have a clear understanding of the risks involved. As The Simple Dollar explains, one of the biggest risks of investing in a rental property is the concentration of your assets. If you put a good portion of your net worth into the purchase of a rental property and things go south, you could lose a lot of money.
Tenants are another major source of risk. Even if you take the time to screen your tenants properly, there’s no guarantee that they will pay rent on time—or at all! Tenants can also cause damage to the property that can mean major repairs when they move out. Your tenants may even decide to take legal action against you if you fail to follow federal and state laws.
In the event you do get sued, you’ll want to enlist the assistance of an attorney. A landlord-tenant attorney will typically cost $225 to $300 per hour, although the first half-hour of consultation is usually fr
If you’re in good financial shape and you can handle the responsibilities of being a landlord, you may be in a position to mitigate these risks. For example, before buying a property, make sure you do plenty of research into the surrounding neighborhood and the people who live there. Learn how to be an effective landlord and avoid problem tenants. Finally, make sure you understand the legal rules you must follow in the role of landlord.
By investing in real estate, you’re on track to earning passive income! Before you make a purchase offer on a property, take the time to develop an investment strategy, budget for ongoing expenses, get a home inspection, and learn about the risks involved in owning a rental property. The more you prepare for this venture, the greater your chances of success!
For more information about Katie Conroy email at kc@advicemine.com
Opinions in this article are that of the guest writer. Do not rely solely on one opinion when making a decision about real estate.