There’s plenty of buzz about the income possibilities of owning rental property and the opportunity to supplement your income with the extra cash, but is owning a rental property a good fit for you in this stage of your life? Here are three questions to ask yourself if you’re considering investing in property.
1. Why Do I Want It?
Take some time to really think about why you want to dive into the world of investment property. Is it because you like the idea of passive income? Is it due to the belief that real estate is the only asset that appreciates over time? In both of these cases, investments can achieve the same goal, even though it may not seem that way with the 2008 market crash still fresh in our minds. When making your decision, you will want to weigh the pros and cons of investing the money versus purchasing real estate to determine which will help you achieve your goals. (For more, see: Buying a Second Home to Rent: Dos and Don'ts.)
Maybe you want to invest in property because you’ve done some long-term goal planning and determined that you’d like to have someone pay off your retirement home or a home that you’d like to gift to your children. In this case, the decision to purchase the investment property would outweigh the option of investing the money. Check your goals and motives, and make an informed decision about why you want an investment property.
2. Do I Really Want to Be a Landlord?
It’s important to understand that buying an investment property isn’t as simple as buying the house and letting the cash roll in. There’s plenty of work involved in upkeep, dealing with vacancies, legal issues and taxes.
Tenants can make or break your rental property experience. A great tenant can mean the difference between your property being maintained and rent being paid on time, to overdue rent, lawsuits, or even permanent damage to your unit. When a tenant moves, you may have to do a lot of work on the home to get it ready for new tenants, all at personal expense.
You also have the work dealing with the legal side of things, such as drawing up contracts, calling references, and even just finding tenants. You may go through times of not having a tenant, which means no extra income and the added expense of paying the mortgage yourself. It’s important to think through these scenarios ahead of time to determine how and if you’re willing to deal with them. (For more, see: Economics of Owning a Rental Property.)
When it comes to maintenance, some people can make the improvements themselves which can save money, but it can also be a drain on energy and time. You can pay a property management company to handle the details, but that could cost you anywhere from 7-10% of your monthly rent, further reducing the income potential. Before jumping into being a landlord, look at the numbers to see what your profits would be and decide if your investment property would be worth the time and the effort involved.
3. Am I Prepared Financially and Emotionally to Deal With Issues That Arise?
Owning investment property is not for the faint of heart. There are many variables and situations that can arise, so it’s crucial that you plan ahead for how you will deal with them.
For example, do you have enough money in an emergency fund to handle a vacancy? If you don’t, would you need to borrow money from family? Would you need to borrow from your 401(k)? Or, if you were to face a financial setback and pass away prematurely, would your spouse be able to continue managing the property? If both you and your spouse pass and the property goes to your kids, would they know who to contact and how to continue managing the property? You may find that if you haven’t updated your estate plan to prepare for these contingencies, you may want to consider doing so.
Owning an investment property can be an incredible way to bring in cash flow and reach long-term goals, but make sure you cover your bases and ask yourself these three questions before jumping into this new venture. (For more from this author, see: How You Can Prepare for a Financial Setback.)
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