How to Buy the Right Rental Property

Investing comes in many different forms and for savvy consumers, diversification means everything. It’s this principle which provides guidance and greatly reduces risk of loss. If you look at the stock market and real estate, these two seemingly unrelated investments are quite similar in one respect: over time, they both demonstrate upward appreciation. It’s true, there are times in which both suffer losses, but, these are only what’s referred to financial professionals as “paper losses.” In other words, these so-called losses are only realized through divestment. If left alone, the investment will recoup any paper loss and appreciate.

How to Buy the Right Rental Property

For some homeowners, a rental property is an ideal investment vehicle. However, if you’re new to the rental market, there are definitely some things you should know before jumping into it. First and foremost is being prepared to be a landlord. When the air conditioner quits or the water heater breaks down, it will be you the tenants call. For a percentage of the rent, you can hire a property management service to do all the things associated with landlording, but, this doesn’t mean you’ll be out of the loop.

“Renting generates a steady monthly paycheck, like a classic dividend-paying utility stock. Any price appreciation is a bonus. But investing in a rental home isn’t like buying a low-cost index fund. Choosing the right property, maintaining it, dealing with tenants—all that takes work. Think hard about whether you’re prepared to put in the time.” —Time

If don’t have a problem with being a landlord or are comfortable hiring a property management service, you still have to find the right rental property. This doesn’t seem as though it would be an obstacle to real estate investing, but, this is precisely where too many first-time landlords go wrong — very wrong. When you buy a rental property, you’re doing just that; you are not purchasing a primary residence. You’ll have to accept this fact and know how to buy the right rental property to make it a worthwhile investment:

  • By at the right price. Even though you know how much you can afford to spend, it can be too tempting to go a bit over budget to get the “right” rental property. This is a huge mistake that will haunt you for as long as you own the home, so, it’s best to avoid it altogether.
  • Find a good neighborhood. While you certainly don’t have to purchase a property in an expensive, upscale neighborhood, you should completely avoid bad ones. Middle income neighborhoods are usually ideal for rental properties.
  • Beware of “fixer upper” properties. So you might have your eye on a property that needs a little work and it’s got real potential. What’s more, you know that you can get it at a substantial discount precisely because it needs work. Beware because the work could well turn into a money pit.
  • Purchase a property that’s close to your home. It’s doesn’t pay to be a long distance landlord, even if you hire a property management service. The fact of the matter is, there will be emergencies and problems will arise. In addition, you will have more peace of mind if you can occasionally drive by the home.
  • Form a list of experienced and reputable service providers. You’re probably not licensed as an electrician, plumber, and HVAC technician, but, you will inevitably need these services. Before you even purchase a rental property, it’s a good idea to have specific individuals to look at the home and be available after you’ve bought and rented it out.

When you find the right neighborhood and home, and purchase a rental property, you ought to be prepared for vacancy periods. Of course, the first will start from the moment you walk away from the closing table. There will be vacancy periods, which can last three months or more.