Rental property ownership can be a consistently rewarding investment. Since desirable properties in desirable areas can generate a king’s ransom in passive income each month, there’s little wonder as to why so many people are keen on buying up rentals. However, while rental property ownership is indeed considered a form of passive income, this doesn’t mean that property owners can simply kick up their heels and wait for the rent checks to come rolling in. To help ensure that your first rental property investment is a profitable venture, make an effort to avoid the following blunders.
Failing to Research a Property’s Location
As far as many rental property owners are concerned, a property’s location takes precedence over the property itself. Unsurprisingly, properties located in popular, high-income areas tend to command much higher rents than properties found in low-income, slow-growth areas. So, even if a property is reasonably new and contains an impressive number of amenities, you may have trouble renting it for your desired price in an area whose desirability is one the wane.
With this in mind, thoroughly research the location of any rental property you’re thinking about investing in. Among other things, look for information concerning the locale’s median income level, crime rates, job market and rate of growth. This isn’t to say that you should exclusively invest in properties in popular areas, but getting a feel for a property’s location will provide you with a solid understanding of how much income said property is likely to generate.
Failing to Factor in Repair/Renovation Costs
It’s important for first-time landlords to understand that rental properties are a perpetual investment. In other words, your expenses aren’t limited to the purchasing price and property taxes. For one thing, since homeowners insurance isn’t applicable to rental properties, you’ll also need to factor in the cost of landlord insurance.
So, before making an offer on a property, enlist the services of a certified home inspector. This person will go over the property with a fine-toothed comb and compile a list of the various problems they encounter. Although certain issues with the property may be glaringly obvious, others may not be apparent to anyone but the most seasoned of pros.
After you’ve been made aware of any problems, obtain estimates for the necessary repairs/renovations. Depending on how much the work will cost, walking away from the deal may be in your best interest. You may also want to consider requesting that the seller deduct the cost of repairs/renovations from their asking price.
Needless to say, failing to have a property inspected is among the most important mistakes to avoid when investing in real estate. Even if you feel the need to act quickly, such haste is liable to cost you a considerable sum and get you stuck with a money pit of a rental property.
Failing to Properly Screen Tenants
Keeping a rental property afloat in the absence of good tenants is an impossible undertaking. As such, any tenants you take on should be able to comfortably afford rent and consistently make their payments on time. Since evicting tenants for nonpayment of rent can be a relentlessly difficult undertaking, you should nip this problem in the bud from the outset with thorough applicant screening.
If a prospective renter presents themselves well and says all the right things, you may be tempted to simply go with your gut and let them move in. However, being charismatic doesn’t equate to being a good tenant. So, with each applicant’s permission, run a credit check and background check, confirm employment or other sources of income and contact any references they provide. While this is likely to take a bit of time, all of the effort you put forth will dramatically reduce your odds of getting stuck with problematic tenants.
Assuming that every rental property purchase represents an equally profitable investment is pure folly. Unsurprisingly, investing in your first rental property with such a mindset is likely to have significant financial consequences. If you truly wish to turn a profit with your very first rental property, it is imperative that you put in the work. As any longtime property owner will tell you, there’s a lot more to being a landlord than just collecting rent checks. First-time rental property investors looking to see the maximum ROI would be wise to avoid the missteps discussed above.