Should You Buy an Investment Property?

A successful investment property has about a 25% return on investment for the landlord. As enticing as that figure may sound, that is, of course, a property being rented out under ideal circumstances. The truth is investment properties (houses that you buy to rent out to others for profit) are just as risky and require just as much effort as any other real estate based investment.

Should you buy an investment property? Here are the questions you need to ask yourself before you move forward. These questions may sound tough, but they’re not meant to discourage you from the opportunity. They are meant to cover your bases so that your next real estate purchase will be lucrative!

investment property

What does the housing market look like?

A slow housing market is a good time to strike. Low interest rates and stagnant inventory will equal the best deals for you. A weak market also often means more people are looking to rent instead of buy. Your rental property could be just what the neighborhood shoppers need.

Can you pay cash?

Do you have to pay in cash for an investment property? Not at all. But we highly recommend it. Here’s why:

1) It’s harder to get a loan for an investment property. It’s not like when you got a mortgage for your house; this is a business. The bank is taking a bigger risk on this property, so there will be higher rates and other negatives to a loan.

2) If you do successfully get a loan, you’re still not setting yourself up for success. If the property sits empty for a few months unexpectedly while you’re still making payments, the money will dwindle fast. If the house is all paid off, every month you have a renter will have minimal expenses.

Do you have a business plan?

It’s pretty easy to calculate your projected income based on how much you’ll charge a tenant for rent. Calculating business expenses can be a little trickier. Here are the key ones to not let slip through the cracks:

  • Projected Vacancy Costs – Usually estimated at about 5-10% by professionals. This is the cost of maintaining the lot while it sits empty.
  • Utilities that are not covered by the tenant.
  • Property Taxes! Yeah, turns out you still owe those even if you’re not living there…
  • Repair Costs – You’re the landlord now. You finally have the power! You also have to fix the perpetually clogged toilet.
  • Property Insurance

It may not quite cover every possible scenario, but we found a very helpful Investment Property Calculator at Good Mortgage.

Have you accounted for the miscellaneous expenses?

If the property isn’t near you (or maybe even if it is), you’ll want to hire a property manager. That will cost extra.

Are you going to let any Joe Blow off the street live in your house, or would you rather conduct background checks? Because those have fees attached, as well. So do the credit checks to ensure the people moving in can actually pay their rent.

You may want to pay for legal counsel to look over your tenant contracts to make sure you’ve covered your assets.

There will be plenty more unpredictable expenses to add to this list. It’s just like your primary residence – there will always be unexpected costs. But if you are able to answer these questions with confidence, it’s a good sign you’re ready to start making that significant ROI from a rental property!