Investing in rental property is a choice that has both positives and negatives. Going into real estate investment with your eyes open is a good idea, so you can be prepared for the possible problems you may encounter. Many professionals in the field claim that getting involved in rental properties istheir best decision and selling them istheir worst.
Upfront and Hidden Costs
When it comes to investing in real estate, there are both upfront and hidden costs that must be considered. The hidden costs can add up, so it’s important to prepare for them.
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- There is often a higher cost for real estate investments. Prepare to pay a bit more on the interest, as a rental property is considered riskier by lenders. Many also want a down payment of 15 to 20 percent. Some homeowners choose to pull out cash equity from their personal residence to use as an initial investment.
- Property taxes must be paid every year, so contact the local municipality to find out the exact rate.
- If the property you are purchasing requires remodeling and repairs, try to roll this cost into the mortgage. The cost to replace a roof, furnace and other major upgrades can add up and become unmanageable for first time investors who don’t plan ahead for these upgrades.
- Homeowners insurance should be taken out for the property. This is not the renter’s responsibility. While you should encourage the renter to consider renter’s insurance to take care of their own belongings, the residence is your responsibility. Your insurance agent will be able to give you an approximate price based on the value of the home you’re purchasing.
- If the house sits vacant without an income, you’ll have to continue to make payments on the mortgage and utilities.
- Basic maintenance and repair costs can add up. A renter isn’t as likely to take as much care with your property as you would. This means that you’ll probably have to repaint and clean flooring at a minimum when a tenant moves out.
- Some neighborhoods and condominium complexes require homeowner association fees.
- You will incur costs to advertise to potential renters or take non-paying renters to court to recoup your lost income or to have them evicted.
- Will the renter cover the cost of yard upkeep or will you need to hire someone to mow and take care of landscaping?
Get Advice from Experts
One of the best things you can do when first starting out in real estate investment is to gather advice from those who’ve gone before you.
Start by talking to your realtor. She will know which neighbourhoods are most desirable due to schools or proximity to shopping and restaurants and which neighbourhoods to avoid. She can also guide you to properties that will be most desirable to renters, such as a three bedroom, two bathroom home.
Next, spend some time talking to your mortgage broker about whether the property is a good investment that will help you meet your financial goals. At Markpricemortgages.com, for example, Price mentions that he is happy to share his knowledge about the real estate and mortgage market with clients.
Taking the time to do your research before you buy an investment property will pay off in bigger profits later on. Becoming a landlord is an excellent way to increase your net worth and even to plan ahead for retirement.