Rental Property Real Estate Investment 101

Real estate investment comes in many forms, yet one of the more popular ways remains rental properties. Being a landlord, however, can be a lot of hard work and can take up a significant amount of time. So, before investing, you should take the time to understand what owning a rental property entails.

Rental Property Pros

Additional Income

Naturally, a key benefit most think of when considering rental property investment is rental income. In order to ensure you’re set up to turn a profit, however, it’s smart to first weigh your costs (mortgage, insurance, taxes, utilities, etc.) against the prices of comparable properties in the area.

Home Value Appreciation

If you’re already a homeowner, you’re well aware of how your home’s value can appreciate over time. The same can be true of rental properties, particularly if your home is in an up-and-coming neighborhood or if you make upgrades over time. Market appreciation can also increase the amount of rent you can collect on your property.

Tax Breaks

There are certain tax deductions you may take advantage of as a rental property owner. These include required expenses (e.g. mortgage interest), maintenance costs (e.g. plumbing repairs), and depreciation. Do your research or work with an accountant to ensure you’re taking full advantage of every tax break available to you.

Rental Property Cons

Property Management Duties

If you’ve ever been a renter yourself, you’ve likely reached out to your landlord or property manager when an issue occurred. As a landlord, you’ll need to be prepared to respond to your tenant’s needs. And like any home, your rental property will require maintenance and repairs that could be costly. You’ll also need to ensure your tenants pay their rent on time each month and be ready to take action if late rent becomes an issue.

If you don’t foresee yourself having time to adequately tackle these responsibilities, you may want to contract a property management company. Just remember this will be an added expense to factor into your overall budget.

Tenant Transitions

In the rental business, there’s no guarantee your property will be occupied 100% of the time. And of course, your rental sits vacant, you’ll be responsible for all ongoing expenses. 

Even if there is little to no gap between renters, there will almost certainly be out-of-pocket costs for you in transitioning your rental between tenets. Such costs include minor repairs, a fresh coat of paint, and perhaps even professional cleaning services. A security deposit from previous tenants can come in handy to cover the cost of unexpected damage, but it’s still a good idea to budget in extra cash to help cover rental transition periods.

Vacation Home Rentals

A vacation rental is another route to consider. With this direction, it’s often best to focus on a home in a desirable vacation destination, such as the coast, mountains, or major city. There are various vacation rental management apps available that can help streamline the process for you. You can also adjust the rental cost by the month, week, or even day, to maximize earnings during peak periods. Plus, you’ll have the benefit of a well-maintained vacation home for yourself when you want to get away.

On the downside, you’ll likely experience more wear and tear from guests coming and going. You’ll need to make sure the home is sparkling clean and well-stocked between guests (or hire someone to take care of such upkeep for you). You’ll also be taxed on your rental income. 

Before making any moves, however, be sure to fully research rental restrictions in your desired area. Vacation rentals can be fully restricted in some areas, so make sure you’re buying somewhere that will allow it.

Rental Property Loans

If you’re ready to take the next step in real estate investment, the first thing you should do is get quotes for your rental property loan. Rental property loans tend to differ from conventional home loans, so before getting started there are a few things to know.

Real estate investment loans are often viewed as riskier than conventional home loans. For this reason, you may need to make a down payment of at least 20%, prove that you have at least 6 months of cash to cover mortgage payments and have a good credit score. If you plan to take out additional loans for more real estate down the line, down payment or credit score requirements will likely increase.

Every lender is different and therefore will have different requirements, so be sure to get quotes from several lenders to weigh your options.

The Decision to Invest in a Rental Property

Investing in a rental property is not for everyone, particularly on the management side. So before you take on a rental property, you should consider carefully whether you’re both financially and mentally prepared for the commitment.

If you’re ready to explore quotes from lenders, Directors Mortgage Direct Portfolio Lending is a great place to start. Our seasoned team of private lenders are well-versed in portfolio loans and can help you secure the best rate possible. When you work with Directors, you’re working with fellow members of your community. We love where we work and live and want to help make your investment in our community a success. Visit.directorsmortgage.com/direct-portfolio-lending to learn more.