How to Decide to Buy Rental Property

Rental property can be a source of income or a drain on finances.

Your personal financial situation and goals, along with the current rental and real estate market, are all factors to consider before buying rental property. When you have the resources to purchase rental property and decide it is what you want for your financial portfolio, there are a number of considerations to weigh before making the final decision. You may discover the decision is not just if you should buy, but where you should buy.

Instructions

1. Identify the rental markets in the area you are considering. Depending on the community, there might be a demand for full-time rentals, seasonal rentals or vacation rentals.

2. Evaluate the demand for the different types of rental property in the area, and the average rents charged. For example, a beach community might have an active market for full-time and vacation rentals, yet the prices charged to vacation rentals are typically much higher, yet for a shorter period.

3. Calculate the costs of preparing the property for rent after the initial purchase. While an unfurnished house is suitable for a full-time rental property, if you enter the vacation rental market, the house needs to be completely furnished, including dishes and linens.

4. Investigate property managers in the area, discovering the fees they charge and services they provide. Even if you decide to manage the property yourself, in some states, such as Arizona, you need to either live in Arizona or assign someone in Arizona as a person responsible for the property. The purpose of this type of law is to have someone within the state, as opposed to across country, for your tenant to turn to should there be a problem with the property.

5. Compare your realistic monthly rent income with your monthly expenses for the rental property. This includes mortgage payments, property tax, insurance, management fees, maintenance and repairs. If property values are rising, it is not necessarily bad for the expenses to exceed income. Consult with your accountant to determine if a rental loss is advantageous to your financial situation.

6. Consider your ability to maintain the rental property should it fail to rent for some reason. If failure to rent the property will be a significant financial hardship for you, perhaps it is not the time for you to purchase the rental.

References

• "Modern Real Estate Practice"; Fillmore Galaty, et al.; 2006