Many people successfully invest in rental property, but that does not mean it is easy money. Like any business, there are ways to increase your chances of success and reduce your risks. Here is what you need to know before buying rental property.
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1. Not every property is a winner.
Not all properties are alike. A good rental property is not necessarily a property that you personally will like. You need to understand what prospective tenants are seeking.
For example, you might find a great deal on a small house with two bedrooms and one bathroom. However, the reason it is so inexpensive is that the main demographic of the area is families and no one wants a house that small. This may not be a good investment.
2. Location always matters when buying rental property.
Location, location, location. It is a cliche for a reason. People want to live close to where they work and play. A home located near a city center or major employer will almost always command a premium rental value. The same principle applies to a home near a beach, entertainment district, or other popular amenities.
Of course, you will also probably end up paying a premium to buy a rental property in a prime location. You will need to do the math to make sure it is still a good deal based on your own situation and the factors that matter to you.
3. A common rule for rent is 1% of the home’s value.
A common rule of thumb for calculating a good price when buying rental property is that it should generate at least 1% of the home’s value in monthly rent. If you buy a $100,000 rental property, you want to get at least $1,000 per month in rent.
This is just a guideline and could vary based on local market conditions. More competitive markets may have lower profit margins or you may initially accept a lower rent because you believe prices will rise faster than inflation. If you plan to perform major renovations on the property, you may be able to recoup those costs through an even higher rent.
4. The tax advantages will vary.
If you are buying rental property solely to rent it out, you are operating a business. That means that you can typically deduct maintenance and improvements that a homeowner cannot deduct.
On the other hand, you may have to pay income taxes on your rental income. In addition, you may not qualify for property tax exemptions given for primary residences or could have to pay a higher property tax rate.
5. Renting property is risky business.
Even if you do everything right as a landlord, you could still lose your investment. A tenant could cause major damage or an economic downturn can cause you to lose rental income that leaves you unable to pay your mortgage.
COVID-19 is a perfect example of the risks landlords take. With widespread job losses and eviction moratoriums, many small landlords whose tenants could not pay rent ended up losing rental properties or wiping out years of savings to keep them.
6. You are responsible for maintenance.
As the landlord, you have leasing and maintenance responsibilities. That often includes getting things fixed now rather than later. If a furnace breaks down in the middle of winter, you cannot let your tenants freeze.
While you have some flexibility to pass maintenance responsibilities on to your tenants, local laws often impose limits. For example, you may ask that tenants take on tasks like yard work or snow shoveling. You generally cannot make them responsible for habitability issues like fixing the heat or hot water.
7. Take care when screening tenants.
You probably know that you need to perform a background check and verify employment when your tenants apply for housing. You also need to be aware of fair housing laws and similar regulations in the area.
For example, some areas may prohibit the refusal of tenants whose income comes from government assistance. Other jurisdictions may not allow landlords to ask about a tenant’s criminal history in their application.
8. It’s important to document everything.
When you find a tenant, make sure you have all the documents you need to evaluate and rent to tenants and to manage your property. Rocket Lawyer offers a full selection of customizable and e-signable documents for every property management need. From rental applications and lease agreements to eviction notices, we have everything you need to rent with confidence. If you have questions particular to your property, document, or rental situation, you can reach out to a Rocket Lawyer On Call® attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.