Owning real estate is one of the fastest and easiest ways to build wealth, that being said it is not an investment that works for everyone. Despite all the claims to the contrary being a landlord isn’t creating passive income, there is work involved in being a landlord. That being said it can be incredibly lucrative for the right person. Is rental property right for you? Let’s look at what’s involved in being a property owner and you can determine if this is the investment that you are looking for.
The Down Payment
Buying rental property is not like buying your primary residence, the banks and loan companies have much stricter rules for rental properties. If the property is bigger than a triplex and you have no intention of living there then you can expect to put down at least 20%. You are also going to run up against some stricter loan requirements even with the bigger down payment. You will have to demonstrate the property is in good enough condition to be rentable and you may also need some cash reserves for things like repairs and upgrades.
Aside from your own personal finances that need to be in order to buy rental property you also need to have the financials of the property in order as well. The rental income needs to cover not only the mortgage but the other expenses associated with the property, that can include the taxes, maintenance, heat, hot water and have a little left over for unexpected expenses. There are formulas for determining whether a property is worth buying or not and you can check them out here. You plug in the rents and expenses and it will do the rest for you.
Things break down, tenants will leave their apartments in a mess and your phone will ring in the middle of the night. Are you ready to deal with all of that? You can hire a property management team to handle it but that will eat into your profits.
Dealing with tenants can be a huge pain. It is up to you to collect the rent, make sure they adhere to the terms of the lease, evict when necessary and there are the usual personality conflicts you may also have to deal with. Will you be comfortable doing all of that.
Rental property is a great way to build wealth but it is not without some work on your part. Weigh the pros and cons and decide carefully if rental property is for you.