Buying Rental Property is not as Simple as it Sounds

The idea seems simple enough:  You buy property, you rent it and you earn money on your investment.  However, there are many other things that come into play when you make this type of investment so you really have to examine the situation and make sure that it is something that will pay off for you.

If you are planning to take out a loan to purchase your rental property, then it is really going to pay off if your credit is in order.  If you have large credit card debt, get it paid down.  The less debt you have going into a real estate purchase, the more likely it is that you can get good terms on the loan from your mortgage lender.  On the other hand, if you do not have good credit, you are not very likely go get good terms on a loan if you can get a mortgage loan at all.

If you are going to purchase a property that is going to need repair once you purchase it, you are going to need to have cash left over after you buy the property.  If you are going to have to sink all your cash into the property in order to buy it, then what are you going to do if you need to do roof, appliance or any other type of repairs?  A cash reserve will also help you if your rental property remains vacant for a longer period of time than you thought it would.

You should also ask yourself whether you can save enough for retirement before you decide to invest in a real estate rental.  It is true that your rental can supplement your retirement savings, but you should never count on the rental to replace other retirement investments or totally count on the local real estate market for your retirement. 

There are no general rules of thumb that you can turn to when you buy rental property, but there is plenty of advice from other landlords and experienced people.  It is up to you to make use of what is available so that you can make your investment count.  For example, if you are going to buy a house that is going to need upgrades and repairs, many landlords estimate what the property could be worth after the needed upgrades and repairs and then take 70{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} of that total minus the cost of repairs as the top figure they will pay for the property.  Other landlords say that you should never pay more than six to eight times the rent they expect to make in the first year.  The key to most is to make sure that income from the rental will cover any costs you might have from your own pocket.  Some of the costs you can figure on include mortgage payments, insurance, taxes, maintenance and repairs.  In the end, buying rental property is not a simple matter, but the numbers are fairly simple: if you can break even on your costs, then you will profit from any depreciation and the tax breaks available to rental properties.