November 7th, 2014
Owning and operating investment rental property can provide a number of important advantages financially. As with all investments, here are potential disadvantages as well. However, you can help to minimize possible pitfalls by following certain guidelines to protect your investment.
First, always make sure that you have reasonable and realistic expectations regarding investing in rental property. You should always approach the investment with the goal of achieving a positive cash flow; however, do not expect that you will be able to retire within a year.
In addition, it is important to make sure that you take the time to do your research and ensure that you understand the rules and regulations regarding the ownership and operation of rental property. As the owner of rental property, you must abide by certain federal and state laws which provide specific information regarding your liabilities and responsibilities. Get your team together before you start.
Along those same lines, it is important to be certain that any lease or rental agreements you handle are absolutely legal. If you handle a lease or rental agreement which is not legal, you may experience a number of problems if your tenant happens to violate terms of the lease. To be safe, it is best to have an attorney draft your lease and rental agreements, or look into hiring a property management company to handle the rental agreements.
Before purchasing any property, be sure to have it thoroughly inspected or else you may discover you are facing a set of expenses you did not anticipate.
Buying property for investments can be just as difficult as buying a new home. There’s a limited number of suitable properties, so you need to have a sizable down payment, excellent credit, and be prequalified for an appropriate loan.
When you begin the process of renting out your property, take the time to run credit checks and call references. These are both steps which many novice landlords often overlook in their rush to fill their rental properties and begin turning a profit. Don’t skip this step. Remember that having an empty unit is always better than rushing and having an irresponsible tenant who may destroy your property, get behind on their rent and ultimately prove difficult to evict.
Joining the Landlords’ Association in your local area can also prove to be helpful by putting you in connection with experienced investors and landlords. You can also gain access to reliable contractors, inspectors and other professionals who can make the process of operating rental property much easier.
It is also important that you have adequate property insurance as well as liability insurance. Property insurance will help to protect your investment while liability insurance will protect you in the event anything should happen to someone while on your property.
Finally, take the time to establish an emergency fund in order to cover expenses which may crop up unexpectedly. Remember that you are operating a business and as such you must be prepared for those times when expenses arise. The exact amount that you wish to contribute to your emergency fund is ultimately up to you; however, it should be sufficient to cover typical expenses that may arise. The general rule of thumb is to put aside 20% of the value of your property. To make the process of establishing an emergency fund easier, consider setting aside a certain amount of your rental receipts each month into a special account.
Talk to a reputable loan officer to understand the differences between home mortgages and investment mortgages.