Investing in a rental property seems like a good way to put in some work and money up front and ultimately end up with a great passive income stream, and that’s true, it can be. At the same time, too many people go into the process of investing in a rental property somewhat blindly. They don’t realize it requires research and learning some necessary skills and information to be successful in most cases. There are plenty of books and classes that will teach you the basics, and it doesn’t hurt to see the path other real estate investors have taken. You can find out the career trajectory of one such investor, Than Merrill, here.
Of course, there are probably those success stories that involve someone who starts out without any previous experience and does well, but wouldn’t you rather be a prepared, knowledgeable investor?
The following are some of the key things you should know before you invest in a rental property.
Legal Structuring
Before you ever start scouting properties or making purchasing plans, you should be prepared to protect yourself and your assets. When you invest in real estate, it comes with a high level of liability, and you need to make sure you’ve structured your assets to minimize those risks and protect your personal assets.
You’ll want to work with an advisor who can help you set up an LLC for a rental property and make sure that you maximize your returns without putting yourself at unnecessary risk.
Do You Have the Money?
If you’re considering investing in a rental property you need to take a long, hard look at your finances and make sure you have what it takes. With other investments, such as buying into a mutual fund, you can invest pretty small amounts of capital.
Not the case with real estate investing.
It’s really difficult, if not impossible to invest in a property if you don’t have some additional money set aside. You’ll need to consider a down payment, and you’ll also need to show the bank you have the ability to make the payments based on your savings and income.
Is the Property Going to Create Positive Cash Flow?
If you have a specific property you’re eyeing, is it going to deliver positive cash flow? You’re going to need to think about factors such as whether or not the property has a strong rental history when the last time it was vacant was, and how long it took to fill it the last time it was vacant.
Other things to consider include how much other properties in the area are going for, the property’s expenses over the past year, profit and loss statements for the past three years, and if it’s currently rented, you should look at that agreement.
What Are the Risks?
Finally, before investing in a rental property you need to make sure you’ve thoroughly considered the risks. For example, what happens if you have a lull between renters and you’re still required to make mortgage payments? What about the expenses that come with needing to evict a tenant?
How will you handle it if a tenant damages the property?
A lot of real estate investors find that working with a property management firm makes the most sense for them, but that’s going to amount to around 10 percent of the rent you receive, so are you willing to pay that?
It can sound daunting, and it is, but these are just a few of the many things to keep in mind before venturing into real estate investing with a rental property.
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