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Three Steps to Making a Smart Investment With Your First Rental Property

Real estate is always a major investment, whether you’re buying a home to live in or you’re getting into the rental market. However, the type of investment you’re making as a rental property owner is much different. As a rental property owner, there are more costs to consider, plus the income potential from rent. The stakes are higher—for potential profit or loss—which is why first-time investors need the right information, along with a smart plan, in order to avoid costly mistakes.

Step 1: Do Your Homework

Before you start looking at properties, the first step is to get prepared. This includes researching the local market, gathering financial and legal documents, and making some basic decisions like where your rental property should be located. Taking these preliminary measures will make it easier for your real estate agent to narrow down some properties that fit your budget and other criteria, plus it ensures you’ll be ready to make an offer when you find the right one.

Another crucial part of this preparatory step is to consider all the small details of being a property owner. This part is important because you don’t want to wait until after closing to find out there are costs you haven’t accounted for. For example, owning a rental property means you won’t always be there to keep an eye on things, but you still need to make sure it’s secure. If you want professional security, it’s good to know that it costs on average about $675 to install an alarm system, and that doesn’t include the ongoing cost of a monitoring service. Because this ongoing expense can eat into your profits, it’s worth looking into low-tech security measures, too. Simple steps like keeping shrubs trimmed and improving the property’s outdoor lighting can be incredibly effective at deterring criminals.

Step 2: Double (And Triple) Check That You’ve Found the Right Property

When you’ve gone through the planning stage and think you’ve found the right property, you want to make sure you have as much information as possible that your home is a sound investment. At this point, HGTV recommends revisiting your budget to make sure you aren’t stretched too thin. If that’s the case, they suggest considering alternative ideas, such as looking at a multi-family property like a duplex, which may be more lucrative if you live in one unit and rent out the other.

This is also the point where you want to look closely at the numbers. Besides just the purchase price and all the other costs you accounted for in Step 1, make sure you consider the condition of the property, its age, and any repairs it needs. Will you need to make major renovations or just minor updates to make it attractive to renters? Some of these issues may be obvious, but as Investor Junkie says, you always need a professional inspection. Hiring a home inspector is the only way to be sure the property doesn’t have any costly issues that will need to be addressed. Home inspection services usually run between $300 and $500.

Step 3: Make a Plan for Property Management

All those expenses you need to estimate before closing (repairs, ongoing maintenance, and all the little costs of being a landlord) are only part of the equation. Another cost to consider is what it takes to manage a property, including finding renters, handling tenant issues, and collecting rent. In many ways, owning a rental property is like running a business, which means you need a plan for how you want to handle those tasks. You can do this yourself or hire a property management company. Either way, it’s a cost to consider, whether it’s your time spent working as a landlord or the financial cost of using a property manager.

Only you can decide which option is the best fit for your budget (and your schedule). Being a property owner has amazing potential for helping you build wealth, but it’s important to recognize the possible drawbacks, too. Thankfully, most of these can be avoided when you know what to expect and have a knowledgeable agent to help along the way.

Photo credit: Pexels

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