Rental Property as an Investment

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With today’s declining real estate values, the surplus of properties on the market and low interest rates, many people are asking if now is the time to buy rental property. Sometimes we have visions of the wealthy property owner collecting his rents and returning home to recline in his easy chair. Income you don’t even have to work for. Let other people pay for your property with their rent. If you watch the infomercials that air in the middle of the night you learn how to make thousands of dollars by buying property. If you don’t want to be a tenant you can just make a few repairs and put the property back on the market. If it were that easy more people would be doing this.

You can make money in real estate and there are many people that do. But there are things to consider before you venture in this direction.

  • Not having sufficient savings before purchasing investment property - If you are unable to find a tenant, if the property is damaged or if anything happens which requires cash you need to be prepared. Investment property is usually the first thing you let go when you have financial problems. Because of this risk lenders have stricter credit requirements, lend less money and charge higher interest rates.
  • The owner of investment property truly has to be a jack of all trades - Having real estate knowledge helps. As a property owner you have to abide by local regulations as well as federal regulations, such as you can’t discriminate when searching for a tenant. Being able to make home repairs and do construction type jobs is a plus. There’s a good chance the property you buy will need some repairs or that the tenant will damage your investment. You must to be able to fix this or hire an expert. Local building and inspection laws have to be followed.
  • There are tax advantages to owning rental property - In 15 years as a mortgage underwriter I have learned that most people do not make a lot of money on investment real estate. Those who own only a few properties and just dabble in real estate often incur losses. Individuals who own multiple properties with this as their full time job are more likely to make money. You need to keep good records and talk with your accountant about the tax issues.
  • If the property is financed the lender will require you to have property damage insurance - There are other types of coverage such as tenant relocation, flood, rent loss, general liability and bonding. Make sure you talk with your insurance agent to explore the different types of coverage. Anything that happens to the property will be your responsibility. Investors who do well are the ones who make good choices when selecting their tenants. In some ways they are like lenders. It is critical to review credit reports, verify income and check references. Insurance provides much protection but there is no way to insure against a bad tenant.

Difficulty collecting rent and damaged property are the major problems with investment property. It’s never fun asking someone for money when they are late. At this point you become more like a lawyer. If the situation persists you may need to evict them. It’s not that easy though. There are laws you have to follow or you can be sued. Sometimes tenants move out in the middle of the night. When that happens there is usually damage and unpaid rent. Other times they call you in the middle of the night because it is twenty degrees outside and the heat is not working.

Even though now appears to be a good time to purchase investment property, you should give a lot of thought to this decision. There are good buys out there. But there are also financial uncertainties and credit problems. Buying properties that are already occupied with signed leases are often less risky than vacant property. Good landlords don’t just sit in their easy chairs, they work hard for the money they make. Make sure you are committed to your investment and that you have a sufficient cushion for emergencies before you buy.

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Comments

2 Responses to “Rental Property as an Investment”

  1. JB on April 15th, 2008 1:25 pm

    It’s true there is a lot of work that goes into it. One thing I think people forget about is showing the property, cleaning carpets, etc. to try and get tenants. But there are property management companies that you can hire to do most of this work for you. Of course, they’d be taking a cut of the profits.

  2. admin on April 15th, 2008 4:45 pm

    Thanks for the added info JB

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