Rental properties can be an excellent investment for those with a little extra capital. However, knowing how to financially prepare for setting up a rental business can be quite a challenge, especially if you don’t know the implications surrounding it. That’s why we’ve put together a helpful guide on how to prepare yourself for what to consider when investing in rental properties.
Be Mindful Of How Much Cash You Need On Hand
Buying a rental property is much more than just the downpayment’s cash, but reserves for a slew of other things as well. While most people work out the easy equation of calculating their mortgage cost versus the potential rental price, there’s a ton more that goes into your final costs, as well as how much cash you should have on hand. To give you a taste of potential risks, here are a few common examples:
- Expensive repairs needed to be done to the property.
- A tenant bails in the middle of a lease, leaving you to cover their portion of what would contribute towards the mortgage costs.
- The tax assessment of the property increases.
- Your tenant loses their job and needs time to recover.
When saving for a rental, all of these factors could make an impact. Preparing ahead of time by building a cash reserve beyond your down payment will help quite a bit, especially if you’re trying to develop a reputation as a good landlord. Putting your tenants at risk of health or safety will not only tarnish your budding business but will also leave you probably paying more in the long run than anticipated for things that could’ve been easily avoided. Give yourself some cushioning, as it’s a dangerous move to go into the rental industry ‘cash broke’.
Do Everything You Can To Boost Your Credit
As interest rates are at a low, it’s advantageous to buy in right now, however, that should also come with getting the best rate you can regardless. When buying a rental property, having stellar credit can sometimes mean more than when buying a house for personal use. As we stated above about keeping a cash reserve, there are a lot of extra expenses that will most likely come up with your rental property, so getting the best rate possible to reduce all costs will be a smart move.
Don’t Bite Off More Of A House Than You Can Chew
Although you might get approved for an expensive mortgage, that doesn’t necessarily mean it’s what you can afford for a rental. Not only is having a safety net smart but so is investing in things you can recoup on. A good hypothetical to mull over is ‘if I had to move into my own rental, could I afford it on my own?’. While that might sound extreme, it’s also the cursor of affordability beyond if you can find roommates to help supplement costs. Instead, it’s smart to play it conservative and safe, giving yourself a piece of property that’s worth the investment while minimizing risk.
A good hypothetical to mull over is ‘if I had to move into my own rental, could I afford it on my own?’.
Historic Tax Credits Are A Slow, Slow Process
Many people who get into investing in rental properties rely on historic tax credits to make it affordable. While these can sometimes add up to 50 percent of costs off your tax liability for updating and restoring the property, it also is a process that’s incredibly slow. In some instances, there needs to be approval by the city and state-level employees on your improvements, which can take quite a while to get someone out. Furthermore, applying tax credits can take years from the time you purchase the house, so don’t necessarily expect this to be a quick flip.
While tax credits are a great resource for flippers, they aren’t a fast form of income or even credit, so plan accordingly with what you can afford in a home on your own to truly receive their maximum benefits.
Find Quality Tenants (while adhering to state and federal housing laws)
Finally, the quality of your tenants will determine your overall housing costs quite a bit. Especially if this is a ‘mom and pop’ investment, being able to contain the risk profile of your tenants is vital.
Granted, every landlord is different in who they want to accept, which is why it’s up to you on what type of risk aggregate you want to bring on. On the other hand, it’s also important you abide by federal and state housing laws to avoid a discrimination lawsuit. Check and see what type of criteria you’re permitted to screen and make judgments off of, as you can get in a lot of trouble if not.
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