A rental property can provide you with a steady stream of income each month and allow you to invest in something that might later go up in value, too. While buying a rental property is an appealing way to invest, you should be aware of the potential costs and the work required once you have a tenant in place. With that in mind, consider your costs, potential income, and the amount of work you’re willing to put into property management before you take the plunge and invest.
Will You Make Any Money?
When you purchase a rental property, you have some built-in costs—the mortgage, taxes, property management costs, and more. When these are accounted for, can you charge a reasonable rent and still make money?
This point matters most to those who need a functional, operational rental and monthly income to cover the cost of the investment. If you are buying a property simply to enjoy an increase in value over time, you may not be as concerned about monthly income.
If you need money to pay the bills, though, then you should determine what the proposed rental will cost you annually (with a cushion). You will then need to charge tenants to break even, or better yet, earn a profit.
A look at your local real estate market should give you a good idea of what the home or property you are considering rents for. If it is already a rented property, then the owner should be able to provide you with concrete details about income and costs.
How Will You Buy the Property?
If you are buying a single property home for investment purposes, a conventional mortgage can be used, but if you are investing in a multi-family property, you’ll need a commercial loan. Commercial loans work differently than regular mortgages, so you’ll need to understand how they work and know what to expect from the process.
You should determine what amount you’ll need to put down and how much the home will cost you each month—you’ll need these figures to determine if the rental ROI will be where you need it to be, too. If the mortgage and property costs are going to have too much of an impact on your budget, it may be better to wait until you save up some additional funds to serve as a cushion, just in case a tenant fails to pay or an extensive repair is needed.
Do You Want to Be a Property Manager?
Investing in property is just the start; to generate cash, your rental will need to have some tenants. You need to decide if the everyday tasks associated with owning a rental unit are right for you. It’s okay if they are not—you can hire a dedicated property manager—but you should be aware that any rental property that has tenants will need an investment of time and money. Here are two basic options:
DIY: When you take this approach, you handle the work of finding and retaining tenants yourself; you are also responsible for repairs, maintenance, and other issues. When a toilet overflows in the middle of the night, when the tenant in 2A can’t get along with 2B, or when a rental home is unexpectedly vacated, you’ll be the one to take the phone call and clean up the mess.
Hire a Manager: A business or individual can manage the property for you and field those late-night phone calls. They can also help find qualified tenants, fix what goes wrong, and serve as an intermediary between you and your tenants. Property managers do cost money, but they free up your time and allow you to focus on your own life and investments.
You’ll need to determine which management approach works best for you before you invest in a rental property.
Learning more about the potential risks and considerations of buying a rental property can help you make the best possible investment and ensure you get the ROI you need from your purchase.
Author Bio 
Patrick Freeze is the President of Bay Management Group, which manages about 4,000 units in the Mid-Atlantic Region. The company is overseeing more than $700 million worth of real estate as of October 1st, 2018.
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