Rental property is one of the most lucrative investments in real estate in the U.S. While it’s not a passive investment, it comes with many benefits. You’ll enjoy tax incentives, long-term income, leverage, and value appreciation.
However, investing in rental property comes with risks, and there’s a lot you need to understand before becoming a landlord. Read on to learn the ten tips for buying and managing rental income in the U.S.
Find the Right Location
Without a doubt, location remains a crucial factor in determining profitability when buying and managing a rental property. So, before settling for a specific location, you must ensure it’s close to amenities such as schools, hospitals, malls, and restaurants.
Apart from looking at proximity to amenities, a location with low crime rates, a growing population, and upcoming development plans will attract more tenants. Don’t forget to check the vacancy rate. You wouldn’t want to be stuck with a rental in an area where nobody wants to stay.
Run the Numbers
The end game when buying and managing a rental property is making profits. While the property may look profitable on the surface, you must run the numbers to determine if it’s a worthwhile investment.
Fortunately, the 2% rule applicable in real estate helps you determine the potential returns on the property before you put in your money. This rule states that a rental property is worth investing in if the monthly rental income equals or exceeds 2% of the property price.
Invest in a Rent-Ready Property
Buying a rental property below the market price may be a smart decision. But it may be a terrible idea if the property needs significant repairs. Unless you’re experienced in flipping houses, renovating the property can be costly.
But this doesn’t mean you can’t invest in a property needing repairs. Instead, choose one with minor renovations. You want a rental property that will bring in cash, not one that you have to dig hard into your pockets to make it rent-ready.
Conduct a Proper Tenant Screening
Tenants can make or break your rental property. Good tenants are the backbone of your investment, and you must conduct a proper screening to ensure they are a good fit. It helps you avoid the following:
- Late rent payments
- Damage to your rental property
- Bad reputation because of renting to an unfavorable tenant
That said, conduct a background check on credit ratings, court records, and previous landlord-tenant disputes to avoid stress and expensive problems. Thoroughly vet your tenants to find qualified tenants.
Focus on Cash Flow Positive Properties
Your rental property is cash flow positive if it’s making money. Considering that you may have unexpected expenses or even face challenging economic times, a positive cash flow property ensures you can comfortably manage the mortgage and even have some to reinvest in other properties.
The rule of thumb in investing in rental property is one that cash flows. Focusing on cashflow properties minimizes your risks and improves the odds of profitability. The best thing about this is that it gives you a margin of error to budget for unexpected expenses.
Conduct Property Inspections Before Purchasing
The importance of conducting a property inspection before purchasing can’t be emphasized enough. You may never know the issues lurking within the property, which can turn your investment into a money pit.
Remember that as a landlord, you must pay attention to insulation, fire hazards, slip hazards, and broken glass to avoid potential lawsuits. A property inspection uncovers all these safety concerns, which you can correct before renting.
Understand Your Legal Obligations
Each state has a set of strict laws to protect landlords and tenants. With this in mind, it pays to understand your legal obligations as a landlord. Ignorance of the law will cost you the success of your investment. So, ensure you know what you’re getting into before buying a home and mitigate risk.
The following are your fundamental obligations as a landlord:
- Supervise the administration of the security deposit
- Right to charge a security deposit depending on the state laws
- Disclose the owner of the property for payment or maintenance issues
- Disbursing house keys after the tenant signs the lease
Ensure you confirm with the state laws for any degree of liability and that you’re meeting the set legal obligations as a landlord.
Save for Unexpected Costs
Owning a rental property comes with accounted expenses such as taxes, insurance, and maintenance. But nothing prepares you for unexpected costs like bad tenants, maintenance issues, vacancies, and legal fees, which eat into your profits.
Thus, saving for unexpected expenses with a high potential of occurring is more important than ever. Alternatively, you may seek the help of property management professionals like West Hollywood property management if managing costs is a challenge.
Use Leverage
After purchasing a rental property, you may be spread thin between paying for utilities, mortgages, and taxes. As a result, you may have to go back to your pockets to cater for unexpected expenses. But this doesn’t have to be the case.
The best part about investing in a rental property is that you can use leverage to buy it instead of fully financing it. Consider putting a down payment and taking a mortgage for the remaining amount. Then leverage the monthly rental payments to pay it back. You can free up your cash for repairs or save for a rainy day.
Partner with an Expert Property Manager
You’ll realize that managing a property is a full-time job that takes time and dedication. Achieving high profits requires consistent expense assessment while minimizing turnover by maintaining quality tenants.
This is where experienced property managers come in. They take out the guesswork and ensure you meet your long-term goals while managing the day-to-day operations. Partnering with property managers frees up your time, and you can focus on growing your rental portfolio.
In Closing
Buying and managing rental property is an excellent way to grow your assets and income. If done right, it can be a worthwhile investment. These ten tips will help you turn your rental property into a successful venture.
