According to them, leveraging your way to real estate nirvana is the quickest, easiest, most foolproof path to join the rich and famous.
But not so fast.
There are a host of considerations connected with buying rental properties. Have you considered what is means to be a landlord? Phone calls in the middle of night for broken sinks or clogged toilets, destruction of property, late payments, loss of tenants and vacant apartments that now need to be cleaned and repaired to be ready for the next potential renter. It also means credit checks, maintenance, utilities, exterminators, insurance, legal advice, advertising and other costs that you might not have considered.
So before buying, ask yourself some serious questions—here are nine to get you started.
- Why is this property available for sale? After all, there are lots of professional real estate companies examining deals all the time. Why has this one escaped their notice?
- What is the history of rents over the past years, including stability of tenants? If tenants have been there long term, that might be a good thing. But if they’re paying below market rents, then getting them to pay more might be a problem. If the property is a revolving door of tenants that tells a completely different story.
- How much cash do you have to put into the deal and how much are you willing and able to borrow? Remember, the higher the debt, the more you have to earn each month to cover the base costs.
- What is the cost of money for the property? Your interest rate can very well determine the financial viability of your investment.
- How long can you carry the property without it being fully rented? Remember, regardless of whether your tenants pay you, you still need to pay the real estate taxes, mortgage, insurance, utilities and other carrying costs.
- Who has managed the property: a professional management company or the previous owner? What’s the cost of management and are they reliable?
- Unless you are a whiz at painting, electrical, plumbing and building repair and maintenance, you will need to hire these folks to show up and get the job done—and at a cost efficient price. These are potentially uncontrollable costs that can turn a decent deal into a stinker.
- What’s the best way to own the property in terms of a legal entity that will protect you personally? If you’re going to do this, make sure you have excellent and experienced professionals to help you make the right decisions. You want to hire an attorney and CPA who really understand real estate.
- What insurance protection will you need? Not only do you need property protection, but liability coverage will be essential. Here’s where working with a talented, experienced insurance professional is vital.
At the end of the day, buying rental property might be a great deal for you. Just realize it isn’t a no-lose proposition. You are bidding against professionals who, in all likelihood, know tons more than you do. So approach the decision with the highest degree of skepticism and care. Examine the worst-case scenario and if you can live with it—then go for it!