With most areas and states experiencing stronger real estate markets, now seems like a great time to buy rental properties. Markets are thriving again, growing in equity, and making buying a home seem better and better. For inexperienced buyers, however, this idea can still be scary and fairly risky.
Is it worth the risk?
Well, that depends. There are guidelines every potential rental owner should consider. Before purchasing an additional home, cabin, or other building, a potential buyer needs to assess their financial situation to make sure they can cover costs – even if the rental doesn't rent, analyze where they want to purchase property, and consider all the different types of property.
If you and your family follow these guidelines, you will be better prepared for purchasing a rental property. It really is a great time to buy, if you have the resources and time you need.
Assess Your Financial Situation
Buying your first rental property can be a risky venture, so potential landlords need to carefully review their financial standing and situation. Buyers should be absolutely certain they can make a large down payment and handle the second mortgage every month. Buyers should also consider the worst case scenario – no one rents or the renter doesn’t pay. If that happens, the landlord must be certain they can cover expenses.
Commercial, Residential, or Vacation?
Another crucial question to ask before purchasing a rental property is what kind of property will work for you. Commercial rentals require a lot of capitol, but can have big payoffs. These rentals are also most likely to have renewals and self-sustaining tenants. Most stores and businesses will want to do their own furnishings, remodeling, and at least some of the maintenance. Yearly residential rentals require a little less in capitol, but require regular maintenance, more marketing, and could mean yearly turnover. Residential (home or apartment) rentals will allow you to have smaller groups of tenants and could be very stable depending on the area.
Vacation rentals can provide a sizable profit, especially in summer months. The purchase of a small cabin or home is often the most feasible for potential buyers. This does require more marketing and weekly cleaning for turnover. These vacation rentals also require furnishings, covered utilities, and decorating each room. There is certainly more week-to-week work, but for a family looking to expand their income it can be very doable.
Analyze the Local Market
If you are in a college town, yearly rentals are probably the best option. Weekly vacation rentals might be the best fit if you live in Leelanau County, Michigan or Bar Harbor, Maine. Perhaps you are looking into buying commercial property to lease to business? Either way, get specific with the property you buy. If people flock to the area for the beautiful water, look for a deal on waterfront or across-the-street frontage. If businesses are thriving on Main Street, buy on or really, really near to Main Street. If you live in a college town, make sure the rentals you purchase are close enough to campus that students will actually want to live there. Know your audience, know your area.
Author: Patty Brook White
Very practical advice for anyone looking at buying an investment property.