When it comes to building up your wealth portfolio, one asset you may want to add is a rental property. These investment properties can be great for building wealth in the future while making some passive income now. When it’s time to choose a new property, here are five tips to ensure it’s a good one.
1- It Fits Your Budget
First and foremost, you need to do a financial assessment to determine how much property you can afford. In most cases, lenders will require you to put a 20 percent down payment on the purchase of rental property. This is because lenders see investment properties as riskier than personal properties. You should get a pre-qualification from a lender to determine what price range you should be looking in and how much money you’ll need to pay upfront for the loan.
2- Positive Cash Flow
When you’re looking to make money on an investment property, you need to determine what its estimated cash flow will be. You can do this first by determining the prospective mortgage payment based on your pre-qualification. Next, you’ll want to find the estimated rent for a property with a similar number of bedrooms and bathrooms. Then, simply take the total rent that you’ll get from the property and subtract monthly expenses, including your mortgage, taxes, and insurance on the property.
3- Other Rentals Nearby
For you to make money on your investment property, it only makes sense that you choose an area where renters are living. A great way to help discover these areas is to look at local rental listings. Make sure there are a few different rentals in the area that you’re looking to buy as this will signal that there is a fresh pool of renters who do want to live in that locality.
4- Know the Age of Its Appliances
For a home to be usable, it needs to have working appliances. When you first start looking for a rental property, it’s best to check on the age of the appliances, including the bigger ones like a furnace or centralized air conditioning unit. You want to ensure that they have a long lifespan ahead or you offer a reasonable price for the property and purchase new appliances shortly after. You don’t want to be stuck paying market value for a property that requires all its major appliances to be replaced in the near future.
5- Check Local Vacancy Rates
You can find a property in an area with a plethora of rentals. However, if the majority of the local rentals are vacant, it can be an indication that renters are moving out of the area. This is particularly common when major companies move warehouses and bigger stores out of the area. Renters can’t find work, so they move to a new location. Be on the lookout for high vacancy rates, as you’ll likely find it challenging to get a tenant in any of these areas.
Investing your money in an investment property is a great way to build long-term wealth. However, before you run out and buy the first one you see, you’ll want to ensure you go through the tips above. This way, you always get a great investment property that you can be proud of.
