Real Estate Investment 101: Getting Started

Questions To Ask Before Investing In A Rental Home

If you are considering entering the real estate market and becoming a landlord, you may be dreaming of the passive income that you could enjoy, especially after you pay off the mortgage on the rental property. However, there are several questions you'll want to ask before you consider purchasing a home to rent out.

Do You Hold Any Debt?

While some investors carry some debt as part of their investment portfolio, this is something that an average investor should avoid. Speak with a real estate agent and a mortgage lender about whether you should pay off your personal debt before buying a house to rent. Once you have paid down your debts, you will need to put down a larger down payment than what is usually required by a mortgage lender. However, if you have very good credit, you may be able to secure a personal loan and use this to pay for your down payment. 

Should You Buy the Property?

You may assume that purchasing the property with cash is a better return on investment. However, while you will receive an immediate cash flow from your property through rent payments, the annual return on investment may be better for a borrower than it is for a buyer.

However, when you choose to take out a mortgage, remember that interest rates are higher with rental properties than they are if you are taking out a mortgage for your own home. Compare the mortgage payment you must make each month to your monthly income when determining whether or not to borrow.

What Are Your Margins?

As an individual, you will not likely have employees you need to pay. Therefore, when you subtract the cost of paying for homeowners' insurance and maintenance costs, your profit margins can often be higher than investment firms. However, you'll want to make sure.

Besides purchasing homeowner's insurance, you should also consider purchasing landlord insurance. This covers the cost of expenses such as lost rent and tenant damage. When you are a landlord, one of the challenges of this form of investment is that the tenant can become a variable. However, insurance can help you overcome this obstacle.

What Location Will You Choose?

Your location is the most important part of being a landlord. However, with the help of a real estate agent, you'll be able to find a property that will allow you to reach your goals.

To learn more or look at real estate for sale, contact a real estate agent.