Things to Consider Before Purchasing a Rental Property

Investing in real estate has always been considered a path to wealth for investors. At various times over the last decade, the housing market has offered tremendous growth and income opportunities. It still does; however, in the current environment, selecting, buying, and managing property will require a little more research, preparation, and work, and the investment time horizon has been extended. If you’re not willing to commit to at least a ten-year time horizon, it’s probably not a good idea to consider becoming a landlord.

If you are thinking about becoming a landlord, here are five things to consider:

Being a Landlord Requires Time, Effort, and Money

Managing a property doesn’t have to be a full-time job; however, it can consume time and money for which you need to plan. Holding a rental property for ten to 20 years will require a steady stream of maintenance and improvements, not to mention dealing with tenant turnover. Your investment cost estimates should include an allocation of expenses for this.

Great Investments May be Harder to Find

Finding the right properties in an unsettled housing market will take more work. Finding a diamond in the rough requires patience, research, and some good connections. Foreclosures remain a source of investment properties; however, you can expect distressed properties to require a lot of work.

Networking with friends in the real estate business can keep you in the know as to what properties may be coming to the market. Joining investor or property owner groups can also uncover some opportunities. Once you identify a property, you’ll need to do your research – thoroughly but quickly.

You Need to be Financially Fit

Gaining the leverage you need to make a good investment requires getting your financial house in order. It doesn’t make sense to begin your search until you have cleaned up your credit report and lowered your credit card balances. Lenders are taking a stricter stance on financing investment property due to the high rate of defaults over the last few years. Also, their best terms are going to be reserved for investors who make larger cash down payments.

Although the right investment should be able to pay for itself, it would be essential to have an extra line of credit to cover income gaps and to pay for major repairs. You should also have the other pieces of your financial puzzle in place, such as your insurance plans, your retirement plan, and the means, outside of the rental income, to fund them.

Make the Right Deal

Making a real estate investment entails several financial and tax issues that, if not considered in your calculations, can hurt your chances for profit. Indeed, you want to make sure that you pay the right price. This is where thorough research pays.

The key is that rent payments cover your outlay, including mortgage, property taxes, maintenance, and repairs. While there are some tax deductions in managing an investment property, you don’t want to count on them to lower your net cost.

Know Your Liabilities

When you own a property leased to tenants or visited by the public, you open yourself to a whole set of liabilities not covered under standard liability insurance coverages. Injuries resulting from your ownership or operation of the property and are deemed to occur due to your negligence can only be covered through Owners, Landlords, and Tenants Liability Insurance (OLT). OLT coverage was, at one time, a separate form of coverage, but it is now provided under a Commercial

General Liability policy

The coverage is limited to liabilities incurred due to negligence applied to the property while restricting coverage for any occurrence outside the property. It doesn’t cover injuries that occur from the use of automobiles or watercraft. The coverage also includes the costs incurred in any civil action that may be brought against you.