What To Know Before You Invest In A Rental Property

by Hank Coleman

Before You Invest In A Rental PropertyBuying a second home may seem like an extravagance in today’s cash-strapped economy, but it can potentially become a secondary source of income. With low home prices and interest rates, this may be an ideal time to become a real estate investor. However, you’ll want to conduct your research carefully and keep the following tips in mind before you sink your money into a rental or holiday property.

Look at Different Types of Investments

Before you make this significant investment, you’ll need to look at all of your options closely. Some investors look for a vacation home that they can rent out on a short-term basis when not using it. Others prefer to renovate older properties and resell them at a profit, while others will speculate on land that could potentially be developed. If you’re just starting out, it’s usually easiest to purchase a residential house or unit with rental income in mind.

Find the Right Location

Location is extremely important when buying an investment property. The more attractive your location, the easier it will be to find tenants. Although rural areas may be picturesque, if there aren’t any amenities nearby you may be faced with long periods of vacancy, during which time you’ll need to pay the mortgage and utilities out of your own pocket.

The best bet is to choose homes in urban areas, near universities, or in resort communities with a steady stream of potential renters. A location near public transportation links, shops, and green spaces will be ideal. Although these desirable locations will lead to higher real estate prices, it also makes the property easier to sell down the road.

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Get your Finances in Order (in Advance)

Before you fall in love with a particular piece of real estate NSW along the Gold Coast or a historic Brooklyn brownstone, you’ll want to make sure that you’re looking at properties within your means. To begin with, you’ll need to have enough assets or capital to pay for it, along with decent credit. Investing brings with it additional expenses, and you’ll need to have sufficient backup cash flow to whether periods of vacancy or unexpected repairs due to tenant needs. It’s best to speak to several lenders to compare rates and uncover what your options are.

Consider Enlisting a Third Party

If your finances leave something to be desired or you have little to no experience in the real estate market, it may be best to team up with someone who is in a position to help. Many experienced real estate investors welcome partnerships with less experienced investors, working in exchange for the capital that you can provide to the partnership. In return, you gain the value of a more experienced viewpoint, which can help you find a better deal.

You could also work with industry experts like real estate developers, community developers, and real estate entrepreneurs, should they be willing to help. People from each of these professions could become value resources because they have knowledge of different aspects of the industry. These individuals can use this knowledge to ensure that your first rental property experience goes according to plan. Often times, real estate experts will also have relevant education in things like real estate law, real estate finance, and accounting, giving you the opportunity to learn about these aspects of the business along the way.

Use a Property Management Company

Becoming a first-time landlord or an accidental landlord can be challenging, requiring both time and money to ensure that your property is well taken care of. It can be advantageous to shop around for property managers at the same time that you’re looking at properties. They can help with the daily administrative tasks that come as part of the package when you invest in a rental property and keep track of payments and rental income to make life easier when tax season rolls around.

When you invest in a rental property, it can be a great investment. Whether you use a property manager or not, you need to spend a bit of time thinking about these issues to make sure everything goes according to plan.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 581 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 3 comments… read them below or add one }

Bryce @ Save and Conquer

If we were to ever own a rental property, it would likely be somewhere other than where we live, so we would have to use a property management company. The reason I say it would not be near where we live is because prices in the SF Bay Area have never been higher than they are right now. Zillow says our house is worth more today than it ever was in its 55 year history. It’s as if the Great Recession never happened.

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Kostas @ Finance Blog Zone

These are some great tips for purchasing a rental property. I think it’s wise to make sure you go in knowing if you don’t have a property management company you may be left holding the bag, so to speak, when a problem arises. I’m curious would it be better to get a property management company before you sign the papers, or after?

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Jack @ Enwealthen

+1 for property management companies.

While you can save money doing the management yourself, I’d much rather save my time for finding the next investment than for changing locks, fixing toilets, and evicting tenants.

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