Things To Consider Before Buying Rental Property
For anyone looking to develop multiple streams of income and build wealth, rental property can be a great addition to an investment portfolio. While it might not always be 100% passive, real estate is a great investment if you buy at the right time and are aware of potential issues that can and will happen. Here are some things to consider before buying rental property.
In a perfect world, there would be a waiting list for every rental property, but realistically, there will be periods of vacancy. Ways to avoid this include buying in a high demand area and making sure your rental price is appropriate for the type of property and location. Another thing to consider is that something major could happen to your property that might make it uninhabitable, like a natural disaster or damage from a bad tenant. It’s always a good idea to make sure mortgage payments are within what you can afford to cover without causing monthly finances to go into the negative.
All property needs repair from time to time. While many landlords try to schedule maintenance between tenants, sometimes emergency repairs happen. In my opinion, a landlord should always keep an emergency fund for unplanned expenses. While having the right amount of coverage from a company like CIA Insurance will help with emergency expenses, normal wear and tear repairs will have to be paid out of pocket. For our properties, we try to keep an amount equal to what we feel the most expensive repair might be, like replacing a furnace or roof. Some landlords also keep a home equity line of credit open if they don’t have liquid funds available.
A thorough screening and background check, including prior rental references, goes a long way toward avoiding bad tenants. However, if you are in the rental property business long enough, it’s likely you’ll encounter one from time to time. It’s important to be consistent and firm when following the rules of the lease. I think it’s fine to give a good tenant a break from time to time if there is a valid reason. It’s also important to know when to start the eviction process because it can take a while to get rid of a bad tenant who doesn’t want to leave.
Being a landlord who self manages a property means you’re always on call. You have a responsibility to make necessary repairs in a timely manner. You also need the skills to do repairs on your own or have a handyman who is readily available. You will also have to arrange someone to cover if you are out of town. If that doesn’t work with your schedule or expertise, property management services can make being a landlord more passive, but they do take a portion of the profits, usually 8%-10%.
Even with all these things to consider, I have never regretted owning rental property. People will always need places to live, and many of those will always be renters for one reason or another. Although being a landlord can have it’s stressful moments, it can be worthwhile for adding another stream of income to diversify your finances.
Because it is recommended to have multiple streams of income in retirement, we are considering buying a rental property. My husband is pretty handy so the property management should be okay.
I think the most important thing is to know if you are cut out to be a landlord. Can you handle calling a tenant to ask for the rent that is late? Can you deal with evicting someone because the dog they had in violation of their lease ate the woodwork? And while I didn’t have the midnight phone call for a clogged toilet, there was a call because the tenant locked themselves out of the house. Unless you are handy and can make repairs yourself, having to hire a tradesman for plumbing, electrical and other work can really reduce the profit. And when a tenant moves out, there is inevitably re-painting, re-carpeting etc. that needs to be done before a new tenant moves in. If you hire it done to get it finished quickly, that is additional expense. Or if you do it yourself – in the evenings after your “real” job – that takes more time and the property is vacant longer. I acquired my properties from my mom, and while I always thought I’d love to be a real estate tycoon, I actually hated it and lost so much sleep that my husband thought I’d become ill. So we systematically sold the property, invested the proceeds and have lived happily ever since!
There always the myth that you’ll get a phone call for a clogged toilet in the middle of the night. Never had any of those calls, if I did I would tell them to eat lass fiber. Just kidding. I’ve spent most of my time screening my tenants and handling small issues, my handyman takes care of the rest. It’s definitely not passive income when you have issues.
The taxation is my favorite part as it protects my other income. Long term I can leave it to family, earn thousands in income and defer taxes forever.