Have you ever rented a property? If you have, I bet you’ve experienced a little jealousy each month when you handed over your rent check to your landlord. It must be nice to earn passive income from renters.
However, owning a rental property isn’t all about collecting rent checks and skipping off to the bank. You need to make important considerations before deciding to jump into a life of alternative investments and landlording.
This post will help you answer the question should I buy a rental property? We’ll give you the details on the risks, expenses, and options available to rental property investors, helping you build wealth while avoiding the headaches.
Should I Buy A Rental Property?
Let’s kick off this discussion by answering the fundamental question that brought you to this post: Should I buy a rental property? Of course, we can’t answer that question for you, but we can provide you with some context that will make answering it a whole lot easier.
Firstly, let’s consider whether or not rental properties are considered a good investment. Real estate is one of the most stable investment choices you can make. This stability comes from the tangible value of the asset itself—unlike stocks or cryptocurrency, if you buy a rental property you’re buying a physical, tangible asset. Additionally, the value of most real estate assets continues to increase over time.
For rental properties specifically, consider that one-third of Americans rent their homes rather than own them. This statistic indicates that rental properties are a large market that isn’t going anywhere any time soon. In addition to being a stable investment opportunity, investing in rental property also carries the possibility of offering you an additional income stream.
The one downside of investing in rental property is that the initial investment cost can be higher than some other investment opportunities. The average cost will depend on your area and the size and quality of the property you choose. To access higher-quality properties in more desirable locations, you may want to consider group investing.
Pooling money with friends or family members can help you access properties that will offer a better return on your investment. Tribevest’s platform and alignment tools make investing as a group easy and fun. Check out our features and pricing page to learn more. Tribevest helps you save time and frustration when buying property with friends.
Now, let’s take a look at the top five considerations for buying a rental property:
The first thing you’ll need to consider when deciding whether or not to invest in a rental property is expenses. By expenses, we don’t just mean the upfront cost of the property (though that expense can certainly be significant). Remember, you aren’t just purchasing the property: You’re essentially starting a business.
Your new landlording business will require several additional expenses. For starters, you will need to invest in property insurance and pay property taxes. These costs will vary depending on the location and size of your property.
You will also need to be prepared to provide regular maintenance and repairs for your tenants. These costs can include everything from adding a fresh coat of paint to prepare for new renters to replacing a broken window or appliance in the unit. You may want to consider setting aside a portion of your monthly profits on the property to prepare for unexpected repairs.
Related Read: Buying a House with a Friend: 3 Costly Mistakes to Avoid
Lastly, you will need to consider the cost of advertising: After all, you won’t be able to rent out your property if no one knows it’s available to rent! These costs could include roadside signage, online advertising, and listings on rental websites.
Another cost you may run into is the cost of renovations. If you decide to renovate your property upfront to make it more appealing to potential renters, you will need to factor those costs into your calculations. Use this handy rental calculator to estimate your income and expenses over time.
Choose The Right Avenue
Once you’ve wrapped your head around potential expenses, you’ll need to consider your avenue. What do we mean by avenue? Essentially, what do you intend to do with your new income property once you close the deal? There are three main routes you can take:
- Long-term rentals: A long-term rental is the best fit if you want to collect monthly rent at a set rate from your tenants. You can invest in single-family homes, multi-family homes, apartment buildings, and more with the purpose of turning them into long-term rental income properties.
- Short-term rentals: A short-term rental is the best fit if you’re looking to rent your property out by the day or week. You can list a short-term rental on sites like Airbnb or VRBO. This option works particularly well if your income property is located in an area with lots of tourism or entertainment opportunities.
- Flipping and selling: Technically, if you’re flipping and selling a property, you aren’t pursuing a rental property at all, but since it’s a way to earn additional income through property investment, we thought we’d include it. This is the best fit if you don’t want to manage something long-term and have enough capital to invest in renovations upfront.
You’ll also need to decide how hands-on you want to be concerning this investment opportunity. For a relatively hands-off approach, consider using a turnkey solution like Roofstock, Vacasa, or Doorvest.
Learn (and Follow) The Laws
The next consideration you will want to account for when buying a rental property is rental property laws and regulations. Before you get ready to start collecting rental payments, you need to ensure you’re well-versed in the laws and regulations that govern your property and rental type.
A few regulations to keep in mind include:
- Short-term rental bans: Some cities have restrictions or zones regarding where short-term rentals can exist. For example, in Los Angeles, you cannot list an income property on Airbnb (though you can rent a room in your primary residence on the app).
- Multiple dwelling laws: In areas where multiple dwelling laws exist, you can only conduct short-term rentals (rentals of shorter than 30 days) in buildings that house more than three families.
- Licenses: Both short-term and long-term rentals require licenses related to property management. Review the licensing requirements in your area.
In short, take the time to check with your state and city requirements related to rental property management before you make a purchase.
Understand The Risks
You know that every investment has associated risks. Before you pull the trigger on your new rental property, make sure you understand the risks associated with property investment in particular.
As we discussed earlier, real estate is a relatively stable investment. However, there are still a few risks you should be aware of before investing. First the risk of housing market fluctuations. The housing market may be more stable than some other markets you could choose for your investment, but it still changes over time. These changes mean your property could decrease in value as you hold onto it. (On the flip side, it may also increase in value!)
You also have a few risks specific to rental properties. Firstly, unexpected vacancies. If you lose a tenant and don’t fill your space immediately, you’ll find yourself saddled with costs like upkeep, mortgage payments, and taxes, but no income stream to supplement it.
Secondly, running a rental property always runs the risk of renting to bad tenants. A bad tenant may cause damage to the property or even refuse to pay, claiming squatter’s rights and dragging you through irritating legal processes to evict them.
Fund Your Investment
The last question you should ask yourself before investing in a rental property is: How am I going to fund this investment?
If you don’t have the capital to purchase the property of your dreams on your own, all hope is not lost! Pooling money with friends and family using a tool like Tribevest is a great way to access higher-value assets, pool knowledge, share risk, and build wealth together as a group.
You may also want to consider using a portion of the income earned from your first rental property to fund your next investment property purchase.
ANSWERED: Should I Buy A Rental Property?
To answer the question, should I buy a rental property once and for all: Maybe.
We believe that everyone should pursue alternative investments like real estate. Still, if the items laid out in this post feel too overwhelming, you may not be ready to tackle owning a rental property.
On the flip side, you may still be a good fit for buying a rental property… you may just not want to do it alone.
Using Tribevest’s alignment and communication tools and platform, you can team up with friends and family to invest in the perfect rental property. Investing in a group spreads the investment risk and spreads the responsibility. Take advantage of your social circle’s investable capital and life experience to make your rental property dreams a reality! To see how, start a Tribe with Tribevest today!