How to buy a house to rent as an investment home

Investing in real estate can diversify your income streams. But before you finalize your purchase for a house to rent, review these tips about what to look for when buying an investment home.

When your real estate transaction is focused more on investment or passive income, you have several considerations you wouldn’t if you were buying a primary residence or vacation home.

What You Should Know Before Buying a House to Rent

Learn these tips for purchasing an investment house to rent to ensure the best result from your investment.

1. Make Sure Rental Properties Are Right For You

Rental property management is not for everyone. Serving as a landlord requires the ability to stay friendly despite constant requests and nagging. It’s going to be a great deal of work to oversee a rental property, so you have to ensure you can commit the time to the activity.

Additionally, rental property owners need to know about managing a property. So if you don’t own your residence, you likely aren’t ready for an investment property.

2. Review Whether You Should Finance the Purchase

Some investment experts believe you should only purchase an investment property if you can buy it outright. And while that might be ideal, reaching the point where you can purchase a property outright without a mortgage is challenging.

Additionally, if you wrap up too much of your cash flow in a rental property, it can be challenging to maintain the property if anything major were to happen unexpectedly.

While you’ll pay more for the home long-term, you’ll also free up funds to invest in other areas and diversify your investments.

3. Choose the Rental Property Location Carefully

Location is everything when it comes to real estate. If you don’t pay close attention to a home’s location, you could lose your investment quickly. That’s because as areas lose popularity, the value of your real estate could decrease. Decreases in property value will have both short-term and long-term effects. In the short term, you'll have to lower the rent. Long-term losses will come in not getting the same value back out of the property once you choose to sell it.

The goal is to look for areas that are appreciating or gaining in value. That way, you’ll earn rent income while knowing you can sell the property for more than you bought it for at any point if

need be.

4. Be Prepared to Hold the Property Long Enough for It to Pay Off

When evaluating purchasing a house to rent out, you want to decide whether you can afford to hold the property long enough to make it pay off. Planning to purchase a property and only rent it out for a year or two before selling likely won’t be effective.

It takes many years to make the expense of closing on a rental property and doing some upgrades or ongoing maintenance pay off. The longer you hold the property, the less disruptions will impact the long-term income.

For example, your profit margins on a rental property can look great the first year, but then you face an eviction situation that costs you thousands or even tens of thousands of dollars. Now you have a year with a loss, which drags down the value of the property long term. If you were to sell the house after year two, the investment wouldn’t look so great. But if you hold it another five with minimal disruptions, now you’ll experience incredible value from the property.

5. Set Aside Money for the Unexpected

Just like when you purchase a new home that you plan to reside in, you can face unexpected events that could lead to major expenses. For example, a major appliance might go out in the first few months or years of ownership. You’ll need to have liquid funds to cover such expenses to ensure as little disruption to tenants as possible.

6. Learn Rental Laws

There are both state and local rental laws you’ll need to adhere to. For example, there are laws around security deposits. You can only hold them for so long after a tenant moves out and you’ll need to have careful bookkeeping and accounts where you’ll place these deposits.

Some states have laws that say that if the landlord doesn’t return the security deposit quickly, the tenant can pursue double the amount. Likewise, some homeowners associations (HOA) have rules against renting out a house. So before you purchase a property, review the HOA laws to ensure this is a friendly neighborhood for an investment property.

Purchasing real estate that you intend to use as a rental property has many nuances. The Robertson Team offers local real estate expertise for Charleston, South Carolina. We’ll help you find the perfect house to turn into a rental property to begin your passive income stream and diversify your investments. Contact us now to get started.