Investing In a Rental Property: Where to Start?
Explore your options before making the leap to being a landlord
Many of us are interested in learning more about buying an investment property and renting it out. But where to start? While this can prove to be a good way to steadily build wealth, this type of investment is a major commitment and is certainly not for everyone. Making the leap to being a landlord requires careful consideration. Understanding the risks involved, as well as collecting sound information and advice are the keys to planning a successful venture. Here are some things to bear in mind as you explore your options:
Research the local market:
Get up-to-date information about your local rental and real estate markets so you can make an accurate estimate of how much you can charge for rent, as well as how much you should pay for the property. Your real estate agent has expertise on local conditions and can provide solid guidance in this area.
Make sure you add up all the costs. In addition to expenses such as a mortgage and taxes, the longer you plan to own the property, the more you'll most likely need to invest in maintenance and repairs. For maintenance, a rule of thumb is to set aside about two percent of the home's value per year. A home equity line of credit is a good way to have access to contingency funds should you need to pay for repairs, gaps between tenants, or other expenses.
Don't forget to factor in the cost of fire insurance, and for recreational property potentially other types of insurance (against floods or windstorms) depending on the location. Liability insurance for landlords can cover risks such as malicious or accidental damage to your property by a tenant, any legal liability should a tenant injure themselves, and lost rental income should tenants move out without paying.
Learn the tax implications:
Mortgage interest and many costs associated with buying the property may be written off. Your accountant can provide full details on the tax consequences of such an investment.
Know the law:
You should study up on the rental property laws in your jurisdiction, including fair housing laws, to make sure you know your rights and obligations and also those of your tenants.
Seek advice on financing:
There are unique aspects to financing rental properties: lenders typically expect a down payment of at least 10-15% if the mortgage is insured and 20% for a conventional mortgage. Another option is to draw on the equity from another of your properties. In qualifying for this mortgage, a maximum of 50 to 80% of rental income may be used as "other income" in your mortgage application.
Many investment property buyers use the equity in their primary residence for a down payment. Options for doing this include a "cash-out" refinance, a home equity loan or an equity line of credit.
A mortgage broker can offer a range of unique products and professional advice on the ins and outs of financing investment properties.
Ask yourself: Are you willing to be a landlord?
This can be time-consuming and for some it can be hard to remain emotionally detached when they have to rigorously screen tenants to make sure they're reliable, track down overdue rents and field repair calls. You may decide to let a professional property management service handle the nitty gritty of dealing with tenants. If you choose to rent your property through a management company, expect them to take anywhere from 10 to 15 percent of the rental income.
Take the long view. Having a long-term investment strategy in place can help you ride out any difficulties, such as a dip in the price of the property, periods with no tenants, or having to pay for unforeseen maintenance. When it comes to rental properties, wealth is earned over time, not overnight.
Thinking About Buying An Investment Property? Contact MyDaddyHomes For a Free Consultation:
The different types of investment properties
Return On Investment:
How To Finance The Investment
Benefits of The Investment
The Disadvantage of the Investment
What Type Of Investment Is Better
5 things you should know before buying an investment property
Costs Involved In Maintaining a Property
Using a property management company to manage the property
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