A lot of Americans are renting their homes. In fact, more people are renting than at any other point in the last half of a century. Meanwhile, the real estate market is thriving. Real estate investments look good, especially relative to an up-and-down stock market — the real estate market is beating the stock market for the first time in years. In light of all of this, choosing to buy an investment property seems like a great idea at the moment.
After all, buying instead of renting can give you more value for your money. And if you can afford a second property, you could profit off of the growing rental market while also holding onto an asset that — if the real estate market continues to grow — will get more valuable over time. You could eventually sell it for a profit, even after making tons of cash off of rent over the years!
But before you rush off to buy a property, there are a few things that you need to consider.
Do you have the time and resources to manage a property?
Rental properties are a source of “passive income,” but new landlords will quickly learn that the landlord’s life isn’t quite as “passive” as one might think. Actually, it takes a lot of work to manage a property!
You’ll need to set yourself up legally, get insurance, make repairs, advertise the property, check out potential tenants, agree to lease terms with a tenant, collect rent, maintain the property, and respond to reasonable tenant needs. That’s a lot to do!
You can and should reduce your workload. Landlord software will help you perform a tenant credit check or set up a rental application, and you can also outsource things like maintenance contracts. But you will absolutely need to invest time — and money — into the operation of this investment.
Consider these demands against your other personal, professional, and financial obligations. Do you have the bandwidth to tackle this project?
Do you have the financial flexibility that it takes to own a rental property?
If rental properties were foolproof money-makers, then the question of whether or not to buy one would be much simpler. If you could afford it, you would definitely buy. But whether or not you can actually “afford” a property of this sort is actually a bit more complex, of course, because there are risks involved.
What if the real estate market slumps? What if your investment appears to be losing money, at least in the short term? What if the rental market slumps, and you make less than you anticipated from rent?
If you sold your property under such circumstances and realized a loss, you’d want to have enough other assets to stay financially stable. And if your saw brighter things in the long-term future, you’d want to have other sources of wealth that would enable you to hold onto your real estate investment even during its unprofitable years.
Which means that you should not put all of your eggs in the rental property basket. You should have other assets and sources of wealth. You should have an emergency fund, a portfolio of stocks and bonds, and, ideally, other income sources. If you have all of that, you have the flexibility to start getting into the real estate market.
Do you have a landlord’s mindset?
Hard work and a bit of a safety net are the main things that you’ll need in order to invest in and profit from an income property. If you have those, the good news is that you’re quite likely to enjoy success. Income properties are proven and relatively reliable ways to make money in real estate.
But this path isn’t for everyone. Some may find being a landlord, with its many responsibilities, to be stressful. Others will find it to be fun and rewarding. You should ask yourself if you’re eager to make this commitment. If you are, you could find a way to build serious wealth.