Rental property is a great way to both build wealth and provide new income streams. Should you buy a rental property? Here are a few things to consider.
A Rental Property Require Emergency Cash
When you own a house, it’s important to keep some cash on hand for emergencies. The reality is things will break.
- The dishwasher stops working and needs to be replaced.
- The air conditioning unit goes out in July
- A toilet leaks, causing damage to the floor underneath it
These types of things happen. Not every day, not every month – but eventually, something will need repairs.
Keep in mind you don’t need tens of thousands of dollars here. Several thousand is usually enough to weather these kinds of storms.
Do you have some extra cash on hand to not only be able to handle this with your own house, but your rental home as well? If so, that’s great – let’s move on to the next thing to consider.
Do You Have the Capacity to Deal with a Rental?
Americans are busy. Jobs, kids, seeing friends, church, home maintenance – most of us have a lot going on. Do you have the capacity to deal with a rental property?
If you’re a hands-on type of landlord, here are the types of things you’ll deal with:
- Cleaning and fixing up the property after tenants leave to prepare for new tenants
- Finding new tenants to rent the home
- Collecting payment from your tenants every month
- Repairing things around the house as they break down
These types of things take time. If you’re lucky enough to find renters fast, they pay their bill every month on time, and stuff around the house stays in good shape, that’s great. But it doesn’t always happen that way.
If you don’t have much bandwidth to manage a rental property, another option may be to hire a property manager. They take a cut off the top – generally around 10% of the monthly rent – to manage these types of things for you.
Our advice to you is that even if you choose to forgo a property manager now, you may want to hire one in the future as you buy more rental properties.
Do You Know the Numbers for Your Rental Property?
The last thing we want to mention is to make sure you know your numbers. Rental properties are essentially small businesses. They exist to make money for you, so you want to make sure it starts out profitable from the very beginning.
To do that, you have to know your numbers. One simple rule to follow is the 1% rule. That means you want the monthly rent to equal at least 1% of the home’s purchase price. So if you buy a house that costs $150,000, it needs to rent for at least $1,500 per month.
This rule works because it gives plenty of margin to account for the “surprises” that come from managing rental properties. Stuff breaking, tenants leaving, etc.
Conclusion
Should you buy a rental property? If you have the means and time to manage one, we highly recommend it. Give us a call at 949-651-6300 and we’ll see what we can do to help.