A rental business can be highly lucrative if you do things right, but before that, you have to purchase the right property first. No matter the investor, making a misstep in the buying phase can set you up for unforeseen failure.
There are several factors to consider before you make the decision, and making the wrong choice can significantly affect how your business fares in the long run.
Factors to Consider When Purchasing a Rental Property
Location
Nashville is a huge place, and there are certain areas where real estate investing would make more sense for rental properties. The Gulch, for instance, is close to high-end shopping stores, gourmet restaurants, and other luxury destinations that could make up a good neighborhood. Proximity to amenities can easily allow you to increase your rent price monthly rent price.
Property Type
The kind of property you purchase will also influence your cash flow as well as the amount of work you have to do. Single-family homes will be easier to manage but can be less profitable, while multi-family homes provide bigger monthly rental income but will be harder to manage. With the latter, you can always just hire professional property management services.
Purchase Price
Establish a budget you have for your property by planning ahead. If you buy a single-family unit, for instance, how long before you earn enough to fully pay for it? Will it be a profitable rental property that can cover monthly mortgage payments? Make a realistic financial plan to avoid facing problems with your rental property down the road.
Down Payment
While the purchase price can be paid monthly depending on your financing options, you are still required to place a down payment when buying a rental property. The price will depend on the purchase price and other factors. Even the amount you pay initially or loan options can affect interest rates.
Rental Income Potential
As mentioned before, your potential monthly income is a huge factor in deciding whether buying a rental property is financially sound. It'll be your source of income to pay for monthly expenses as well as mortgage payments. If your investment property doesn't generate positive cash flow, you'll be out a lot of money and still owe your lender.
Rental Market
Rental property investing will be rendered useless if there's no demand for it. Research the rental demand to determine whether your business will thrive or not, as this might also benefit you in asking real estate investors for financing. This alone can already give you an idea about the rental income you can earn.
Property Condition
Before buying a rental property, make sure that it's a rent-ready property, and if not, calculate the property value as well as the maintenance costs you need to pay to make your real estate investment ready for business. This is why an in-person rental property inspection is important before making a decision.
Legal and Tax Considerations
There are state and local regulations to keep in mind before purchasing an investment property such as laws for property taxes, local landlord-tenant laws, eviction laws, building codes, and other legal technicalities you have to know. Rental property owners tend to hire professionals like lawyers or property managers to handle this aspect of the business.
Involvement
In terms of property management, how involved are you going to be in the business? If you're purchasing a multi-family rental property, you might find that it's a lot of responsibility to handle multiple tenants at once, especially if it's your first rental property. You'll have to worry about things like property taxes, rent payments, operating expenses, and more.
Responsibilities After Buying Rental Property
Real estate investing is only the first step. After buying rental property, you get to the part where you become a landlord overseeing an entire business. There are a few core responsibilities you need to do:
Marketing
The way you present your rental units affects your vacancy rates, which in turn will directly impact your rental income. You can use available platforms like social media or listing services stating unique rental features or proximity to public transportation, but you may also hire marketing experts to properly and effectively execute your campaign.
Tenant Screening
Tenant screening is a crucial step before renting to a prospective tenant. By checking criteria like credit score, criminal background, eviction history, and other necessary factors, you'll learn whether they will respect lease terms, conduct unit maintenance, pay tenant security deposits and rent, and whatever else is required of them.
Rent Collection
If you conduct tenant screening, you will have little to no trouble with rent collection. However, problems with late payments or non-payment can still happen, so being diligent is important. This leads to you making the most of your income property, as well as earning enough rental income to pay your total expenses. Giving tenants options for payment in the form of software or a tenant portal could help streamline the process.
Maintenance
Property maintenance is necessary to retain or exceed real estate values. Other than creating safe and habitable living conditions for tenants as required by law, regular inspection and maintenance allows you to identify issues early on and avoid unexpected costs. How often you have to do this will depend on whether you have a short-term or long-term rental, but it is important to keep up your property's appreciation potential.
Accounting
Between property tax rates, closing costs, mortgage interest rates, and other financial aspects of the business, you might need an accountant to crunch the numbers, or a property management company with a team of experts that can both advise you about financials and handle accounting for you.
Eviction
As meticulous as you can be with tenant screening, you may still encounter a tenant who might need to be evicted for the sake of your business or your tenants. If so, there are proper procedures to follow as well as laws to abide by. Not doing so might lengthen the eviction process, or worse, land you in legal trouble.
Let a Property Manager Do the Heavy Lifting!
As a potential landlord, you might already be aware of the serious responsibilities that come after buying a rental property. You can fulfill the role if you do your due diligence, but you don't have to face it alone. With a property manager like Green Tree Property Management, you can earn passive income while you focus on expanding your investment portfolio.
Reach out today to speak with one of our dedicated team members about all that we can accomplish for you!
