When shopping for a rental property, you are shopping for an investment. It’s important to remember that you are not buying the home of your dreams, you are buying a property that will make money for you. Don’t get tricked by unneeded extras while missing on major defects. For example, buying a rental that’s more damaged than it may first appear because you are blinded by a beautiful fireplace or an amazing view from the front window. Long story short, do your best to maintain objectivity throughout the process and don’t overspend before you even get your first tenant!
While there are potentially many great things that can come from owning a rental property in a vacation area, plenty of drawbacks come along with them. At the top of the pros list, you’re buying a VACATION home. Not only could it be a lucrative investment from renting it out to tourists during the busy vacation season, it can be a nice place for some R&R for you and your loved ones. That being said, you may make more money from high turnover (a new tenant every couple of weeks) but you’ll also spend a lot more money on insurance, upkeep, property maintenance and even cleaning bills. You may also experience a lot more vacancy during the slower vacation months. For example, wintertime at the beach! One more thing to think about before buying a rental property in a vacation area is property management costs. If you are an investor looking to pawn off the landlord responsibilities of owning an investment property, you will be unpleasantly surprised by the inflated costs of hiring a property management company to run your vacation home.
If you’re looking into buying a rental property, we know you’ve heard this before: “location, location, location!” So, you’re probably wondering, how do I know if I’m buying a property in the right location? Well, to answer that question you must know the differences between a growth versus declining market. In short, a growth market is one that has a proven trend of growth. Or in other words, the population continues to increase. This is generally due to plenty of job opportunities. If a market continuously offers new job opportunities, people will continue to live and move there. Look for cities and neighborhoods that are home to several big industries. This way, if something happens to one of these industries, causing job loss, there are still several other industries providing opportunity. Another notable factor that effects population growth is desirability. There should be something about a city or neighborhood that makes people want to live there! Think weather, outdoor activities, restaurants, etc. This would be an example of the kind of market you WANT to buy in. On the flip side, a declining market has people moving away due to loss of jobs and opportunity. We often see the very things that make a market desirable like restaurants, shopping etcetera leave those areas as well. Investments in a declining market could possibly see homes decrease in value. You want to make sure you make cash-flow a priority to hedge against any appreciation loss. Buying in a growth market early is your best bet but if you decide a declining market purchase is for you make sure you do your research before investing.
Why is buying a rental property out of your budget a bad idea if it has the potential to make you a lot of money? A common rookie mistake made when purchasing a property is assuming that the down payment is all you need. In reality, when you purchase a rental property, you may experience some unforeseen costs at some point. There are a lot of potential costs that come along with owning a rental property, but for cash-flow purposes, let’s just focus on the recurring expenses. These can include, but aren’t necessarily limited to: mortgage payments, property taxes, hazard insurance, utilities, maintenance and even pest control. While owning rental properties can be very lucrative, it’s not enough to simply subtract your operating expenses from your income. That would assume that your property will never be vacant and you will never have to pay for any upkeep or maintenance. The best properties are maintained and updated from time to time. You should also be prepared financially, always, for some vacancy. There’s no way to predict these situations with 100% accuracy without a crystal ball, so it’s important to set aside a portion of the rent you collect to cover them when they happen. So, don’t spend more than your budget allows and expect the unexpected!
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