Buying a rental property is both daunting and exciting. Not only do you have to master the basics of investing, but you’ll have to assess a wide array of factors and choose the right property to maximize your investment and meet your financial goals.
Like with any investment, owning a rental property comes with serious risks. However, it can be a great and strategic way to earn consistent additional income, grow your wealth, and be on the right track to financial freedom.
But even a single mistake can cost you a significant deal of hard-earned money. Without careful planning and the persistence to take on the steps to becoming a wise and well-informed real estate investor, one may end up going for the wrong property in the wrong location.
A real estate checklist for buyers always comes in handy, especially when you want to find that perfect rental property that will lead you to financial success. Here’s a shortlist of all the essential factors you need to consider so you can make the most out of your rental property investment.
Find the right location
Location is one aspect you can’t change once you’ve chosen your real estate property to rent out. It pays to do your research and thoughtfully narrow down the best markets and locations to invest in for rental properties. Getting the location right will make it easier for you to find quality tenants, deal with the costs of owning and running a rental property, and generate higher returns on investment.
Keep in mind that a property’s location covers more than just the geographical area. Don’t underestimate the role of amenities, accessibility, and neighborhood. Look into several characteristics that make a site profitable and most appealing to tenants.
For example, inspect the overall quality of the neighborhood, the walkability and safety of the area, parking spaces, access to public transportation, proximity to schools, major employers, grocery stores, malls, parks, and other recreational facilities and places people look for when finding a place to rent.
The location of a rental property in the Philippines, for example, will also help in determining the cost of living in specific areas. Tenants know that rental properties in prominent areas are priced higher, while properties outside the metro can provide accessibility at a lower price. Even if a certain rental unit or property may have fewer amenities than others, it may still come at a high price if it is located in a highly desirable neighborhood.
Know your financing options, cash flow, and expenses
Financing your rental property is among the most challenging parts of investing, so take all the time you need to consider the costs. Check out all the available investment options—mortgage loans, hard money loans, private money loans, etc.—that will best fit your financial goals and situation. It’s good to seek the help of professionals who can give solid investing advice and point you in the right direction.
Be prepared to make a huge down payment if you’re after a better rate. In most cases, a 20% down payment is reasonable.
Ensure that you have a firm understanding of all the costs of maintaining a rental property. Recurring expenses include insurance, taxes, management, routine repairs and maintenance, and vacancy costs.
In addition, set a budget for any unexpected repairs, emergencies, and renovations. Fix any structural issues as soon as possible so you won’t have to deal with serious and more costly damages down the road. Try your best to look for a rent-ready property so you won’t have to worry about any major investment in renovations.
Determine how much rental income to expect
Before purchasing a rental property, see to it that you know the potential income it can provide. Try to look at the bigger picture and see if the return on investment will be worthwhile in the long run. Ask the following questions: How much will the rental fee be, and will it be able to cover important expenses? What are the vacancy rates like?
Besides the ability to grow your cash flow, you should also check the potential for real estate appreciation. Find out which areas have significant growth indicators like economic stability, job growth, and population growth. This way, you’ll be investing in a rental property that will help you generate long-term capital gains.
The Benefits and Risks of Investing in a Rental Property
Rental properties can make solid, long-term investments. But if you’re buying a property to let out, you should also acknowledge and plan for the risks that come with the investment. Below are some of the pros and cons of purchasing rental properties to help you evaluate if the investment is worth it.
- Steady passive income source
One of the biggest advantages of owning rental property is you’ll get a recurring income stream while keeping a full-time job or focusing on other properties. It may come with a lot of responsibilities, but you don’t have to do everything on your own. You can make things easier by working with a property management company that can stay on top of day-to-day tasks for you.
The promise of a passive income source makes rental properties highly appealing to those who want financial security during retirement or those who wish to make money on the side.
- Potential property value appreciation
Getting a rental property that is in outstanding condition and in a prime location is a lucrative investment because it is highly likely to increase value over time. Property appreciation depends on various factors and market conditions like economic performance, neighborhood development, and population growth.
If you make the right decisions, you’ll be able to increase the chances of benefitting from property value growth and charge more for rent. Renting out your property also gives you the flexibility to hold onto it and selling only when the timing is right and market conditions improve. This way, you’ll be able to sell the property at a higher price than when you first bought it.
- Tax deductions
Investing in rental property comes with numerous tax advantages. That’s why it’s important for rental property owners to keep all documents and records relating to incomes and expenses so they can reap tax benefits.
Most rental property expenses are either tax-deductible or depreciable. These include home repairs and improvements, property management fees, travel costs, legal fees, maintenance work, accounting services, and utility bills that are included in the rent. Plus, mortgage interest can also be deducted from the total tax.
- Diversification of investments
Owning a rental property enables you to diversify your portfolio and manage investment risk. As the saying goes, “Don’t put all your eggs in one basket.” Moreover, rental property is a relatively stable investment compared to stocks and bonds.
You’ll have predictable passive income by distributing your money into different asset classes and investing in rental property. Even if the stock market crashes, rental property will give you the extra income you need to cover day-to-day expenses. Plus, the housing market is less volatile compared to other investments and the demand for rental property remains high.
- Vacancies can last too long
Vacancies in between leases are among the biggest problems that any rental property investor may face. Vacancies happen for many reasons—from undesirable property location and poor property conditions to ineffective advertising, economic downturn, and rent prices that are too high.
The costs can quickly add up the longer a property is vacant. This means you’ll have to deal with lost rental income and lower returns and find a way to pay for recurring expenses.
- Bad tenants
Nothing can be more frustrating to a rental property owner than bad tenants who damage the property and decrease its value. There are also instances where you can get tenants who fail to pay rent on time or do not pay at all. These delinquent tenants may cause tons of headaches and cash flow issues. Add to that the very expensive and long-drawn-out tenant eviction process that can drain your energy and wallet.
- Costs can stack up over time
The costs associated with maintaining a rental property—insurance rates, property taxes, mortgage, and maintenance—can quickly go up. If you don’t plan for these expenses, you might end up losing money and spending more on the property instead of profiting from it.
- Decrease in rental property value
The value of your rental property may decrease in value due to lack of neighborhood development, unfavorable market conditions, and economic downturns.
The extra income you’ll earn from investing in a rental property is well worth it, but only if you’re willing to put in the hard work to protect your investment. Set yourself up for success by thoroughly evaluating your options and understanding the everyday challenges you will face.
Being aware of the risks and the ways to mitigate them can lead you closer to making your rental property investment a rewarding and successful venture. Weigh the pros and cons, check if you’re up for the responsibility, and know exactly what you’re getting into before finalizing your rental property purchase. Then, with the right strategy, attitude, and determination, you’ll be able to choose the right rental property and maximize its income potential.