You never know how or when you will come across a property that makes sense as an investment. It is not a stretch to say that all it takes is one good rental property to have a significant impact on your bottom line. While rehabs and flips are the current rave, a rental property is a tried and true real estate investment. Not only can you reap the monthly benefits in the way of cash flow, you can see future gains with property appreciation. You don’t need to be a real estate tycoon to buy a rental property and start building your portfolio. If you are considering a rental property purchase here are four important items you need to know.
Different Financing Guidelines. Buying a non-owner-occupied property is much different than buying your primary residence. With your primary residence you can get away with reduced credit scores and a minimum down payment. With an investment property there are a few hard and fast non-negotiable guidelines. For starters, depending on the number of units the minimum down payment is anywhere from 10-20%. Additionally, the credit score minimum can be as high as a 720, depending on the lender. Investment properties are considered a higher risk factor by lenders based on the fact they are a secondary property and if faced with a financial crunch, most homeowners will save their primary residence. Because of this, investment loan approvals are much harder to obtain.
Increased Tax Benefits. There are a handful of favorable tax benefits that come with home ownership. These are ramped up with an investment property. Not only can you take the usual deductions for interest paid, you can write off mileage driven to the property, money spent for improvements and several other impactful deductions. It is not a stretch to say that these tax breaks can change your tax return bottom line by thousands of dollars. This alone can impact how you view the property. A property with just average monthly cash flow can feel like a home run once the deductions are factored in.
Property Management. From the outside, owning a rental property means finding tenants and waiting for rent checks to pour in. As any landlord can tell you, it is not that easy. You may go weeks, even months, without dealing with tenant drama, then in the matter of a few days, you could be faced with three separate matters. Most of these are minor in nature, but they still must be dealt with quickly and decisively. If you own a rental, you are going to have to manage it. If you do it on your own you need to make sure you are available at all hours of the day and can tackle whatever is thrown at you. If you opt for a dedicated property manager obviously this will come at a reduction in your bottom line. There really isn’t a right or wrong approach to management. Whatever you decide to do you need to accept that management comes with rental property ownership.
Hidden Costs. Monthly cash flow can be defined as the residual money that is left from the rent received and housing expenses. The most obvious expense is the loan payment, however there is often more that meets the eye. Depending on your lease agreement you may have to cover certain utilities, lawn care and snow removal. There are also seasonal maintenance fees every quarter or so that also must be accounted for. Individually these costs won’t break the bank but added up can have a real impact on the bottom line.
For every disgruntled landlord there are nine others who enjoy rental property ownership. Just one rental property can boost your portfolio and be a springboard into the world of real estate investing.