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Picture this: Cash rolls in like clockwork every month, and you don’t have to do a bit of work to get it.
That’s the promise of rental properties. In theory, they are passive cash-generating machines that deliver you money every month with little to no effort on your part. In reality, they can be a real pain or, worse, a drain on your wallet.
If you’re serious about owning a fleet of income properties, you may want to read one of the many books available on the subject to uncover all the finer details. And if you’re interested in renting your house to travelers, read this article on how to turn your home into a profitable vacation rental.
For everyone else who is playing with the idea of buying an income property, here is a rundown of the basics.
5 things to weigh when before buying
Not every property can be turned into a moneymaker. Some houses are destined to be duds.
Before closing on an income property, consider all of these factors:
- Prospective renters: Who is renting in your area? Is it college kids who might be happy with a couple of small rooms to call their own, or families who need more space to spread out? More importantly, will the property you’re looking at meet their needs?
- Neighborhood: It doesn’t matter how nice the house is if it’s in a bad area. A property in a bad neighborhood is probably not going to rent at top dollar. Plus, a high-crime area may boost your insurance costs and could make your property a nightmare to maintain if vandals frequently make the rounds.
- Price: For this, you need to consider not only the price you’ll pay for the property but also the price you can reasonably charge for rent. What’s more, will the latter cover the monthly mortgage payment if you end up financing the purchase?
- Taxes and insurance: The list price should be only part of your cost analysis. You also need to estimate the property taxes and insurance you’ll be paying annually. Depending on where the property is located, these costs can make a reasonably priced property unaffordable.
- Condition: Tenants don’t always make decisions based on price alone. They will also take into consideration the condition of your property. Be realistic about the amount of work a home will need to be marketable, and have it inspected just as you would with any other major purchase.
Once you find the right property at a price you can afford — bonus points if you pay cash — the next step is to figure out how you’re going to manage it.
Here, you have two choices. You can do it yourself, or you can hire a property manager. Property managers will cost you some money, but you may find their services are worth the price.