Whether you’ve got extra cash to spare or simply aren’t a fan of the stock market, buying property with the intention of renting it out and making money can be a smart financial move. An income property can also help you diversify your existing investments, and if all goes well, it can generate a steady stream of cash while allowing you to build equity in something you can eventually sell for a profit.
While many people have great success with income properties, there are also those who wind up losing money in the real estate game. Keep the following factors in mind when deciding whether the income property you’re looking at is a smart investment:
The location of your home can make or break your success as a would-be landlord. If you’re buying a property with the intention of renting it out year-round, make sure it’s in a desirable neighborhood with good schools and low crime. If your goal is to buy a vacation property, make sure there’s a nearby attraction, like a beach, ski resort, or lake, to help make it marketable. You can also try buying a home in a college town and renting it out to students. The key is to find a place where there’s a reason why people would want to rent it on a regular basis.
Age and Condition
Nobody wants to rent a property that looks and feels like it’s falling apart. You may be enticed by a lower price, but keep in mind that if you buy an older property in less-than-stellar condition, you may have trouble renting it out. Furthermore, you could wind up with a ton of maintenance and repair work on your hands, which means that whatever you save by buying a cheaper place could be easily wiped out by the amount of money you’ll need to put into it.
Real Estate Taxes
It’s not just your mortgage and maintenance you’ll need to cover with whatever rental income you generate; there are also property taxes to consider. In some areas, real estate taxes can add upwards of $1,000 per month to your overall monthly payment. When buying an income property, make sure you know what you’re getting into tax-wise, and make sure rents in the area are high enough to allow you to cover your costs. Also, do some research to see how often real estate taxes go up in the area. Your taxes may be reasonable now, but if the town you’re buying in has a
history of hiking property tax rates year after year, you may want to look elsewhere.
If your plan is to hire a management company to handle the day to day maintenance of your property, then you probably don’t have to worry about how accessible it is to you. But if you’re planning to do all the work yourself, make sure the property you buy is easy for you to get to. Ideally, it should be close to your primary residence, your place of work, or both. This way, if you get a call from a tenant demanding repairs, you don’t have to drive for hours just to fulfill your obligations as a landlord.
Under the right circumstances, buying a property to rent out can be a great way to generate income. Just be sure the property you choose makes sense from a financial and logistical perspective before you sign that mortgage and hand over your down payment.