Owning real estate can be a great way to generate wealth — especially if the real estate that you own is an income property that generates a regular profit for you at the same time that it appreciates. Rental properties are a great way to earn passive income, which can really boost your ability to save without requiring you to work too much more than you already do.
Income properties work well for a lot of people, but they’re not for everyone. And if you’re wrestling with the decision of whether or not to buy an income property and become a landlord, here are a few things that you should ask yourself first.
Do you have the financial security that it takes to invest in a property?
Can you afford to buy an income property? It’s not as simple a question as it may appear. Even if you have the cash that it takes to buy the property, you need to factor in other things.
It’s expensive to maintain a rental property. And you may have lean times. What if deadbeat tenants refuse to pay rent and won’t move out? Your rental property will be valuable in the long term, but that doesn’t mean that it can’t become a “non-performing asset” in the short term. You need a big financial cushion, including an emergency fund, savings and investments in other areas, and a budget for your fledgling rental business.
Do you know everything that you should about your potential property purchase?
Buying a real estate property is a long and complex process, but every step has a purpose. You need to take full advantage of things like home inspections to make sure that you’re getting the property that you think you are.
Furthermore, you should know a lot about the home before you start taking the steps to buy it. You should know how close it is to transit hubs and other essentials. You should know how it measures up in the local market, too.
Have you researched the market, local laws, and other relevant details?
You don’t just need to know about the house that you’re buying — you need to know about the local real estate market, comparable housing stock, average rents, and more. Be sure to be wary of local zoning laws or co-op rules that could keep you from renting the house or apartment in the way that you want to.
The time to find all of this stuff out is now — before you put down a ton of money on your new real estate purchase.
Do you understand how much work is actually involved?
It’s easy to imagine the passive income rolling in once your property is occupied by a paying tenant. And perhaps you imagine that you’ll outsource things such as property management and maintenance (not a bad idea!), and you figure that will reduce your workload.
Well, maybe. But don’t underestimate how much work there is to be done. You’ll have to do your research on the subjects we already talked about above, work with a lawyer to set up your fledgling real estate business, fix up the place and make sure it’s ready to rent, use landlord software to post your listing, use tenant screening tools and background checks to keep out the wrong tenants, get a tenant to sign the lease, and keep up with maintenance in the place even after it’s occupied.
You can lighten your load a bit with smart outsourcing and great landlord software, but don’t underestimate what you’ll be responsible for.
Do you have the right temperament to be a landlord?
Being a landlord can be personally and financially rewarding. But it’s not for everyone, and certain personality types will have real trouble with it. If you’re not detail-oriented, leases might give you a headache. If you get stressed about people in your valuable space, then this obviously won’t work out too well. If you’re not good with unexpected expenses and budgeting for the long term, then the uncertainties about day-to-day costs could disrupt your income property’s profitability.
It takes a certain type of person to make an income property work. If it’s you, you could build a lot of wealth!