Gaining another source of income can seem appealing to many people. You may be considering buying and operating a rental property as a passive means of gaining income.
However, becoming a landlord and buying a rental property is a large undertaking and you may have many questions about the process. Here is what you need to know about buying rental properties and the finances that come along with them.
Chances are you are looking forward to having another form of income. However, you will have to put in some money first. Generally, investment properties require a 20 percent down payment in order to get traditional financing. In most cases, mortgage insurance is not available for investors in property, which is why such a large down payment is necessary. You will need to make sure you can afford to put a large amount of money down, before you start profiting from a rental property.
In addition to down payments, you will have to consider the yearly expenses that go into owning a rental property. There are a few different elements that factor into the total annual costs of investment properties. This includes, but is not limited to:
- Property taxes
- Routine maintenance and repair
- Unexpected repairs (i.e. replacing water heater, repairing appliances or plumbing, legal expenses etc.)
Probably the most compelling part of investing in a rental property is profit and return on your investments. While it may be exciting to think about a new stream of revenue, you may have to consider that it might not be smooth sailing. Be sure you know some of the potential hardships you will face that could impact your profits. A few risks you could face include:
- Lack of or large time gaps between renters
- Bad tenants that could require eviction and legal fees
- Tenant damages that require repairs
While rental properties can provide a steady stream of additional income, you should understand some of the challenges before you decide to buy.
Be sure to be careful when investing. These are just a few of the many different considerations you may want to make. You might also want to talk with an experience real estate attorney who can give you a better outline of the situation.