Should I Buy a Rental Property?


Buying a rental property is an exciting idea. Many popular bloggers, podcasters, and HGTV show hosts make it look so easy – but is it really?

In the world of Pinterest and Fixer Upper, home renovations and rentals seem easier than ever. Unfortunately, that’s not usually the case. The cost of a home renovation and the stress of renting it out to short or long term renters often makes the process a financial (and emotional) loss. Let’s look at what you need to consider before moving forward with a rental property purchase.

#1: Who’s Responsible for Upkeep?

If you’re renting out your property to short-term vacation renters, you’ll need to consider who’s going to clean your property and get it ready for guests in the turnaround time you have between departures and arrivals. If you’re renting out your property to long-term tenants, you still need to have a contractor or maintenance company on-call who can help you take care of the property if something goes wrong. Sometimes, landlords are able to outsource these tasks in an affordable way (but keep in mind, the more you outsource, the more of your profit you’re giving away), which leads us to the next item to consider:

#2: Will You Make a Profit?

This is easily one of your biggest considerations. It’s easy to assume you’ll make a profit when you ballpark the numbers and only look at the best-case-scenario. Don’t do this to yourself. You don’t want to purchase a home under the assumption that you’ll turn a profit by renting it out, only to be surprised by a few unexpected expenses and a slow renting season. Before you buy, do the following:

  • Evaluate the local rental market
  • Know what you expect to spend both to purchase the property and to maintain it
  • Estimate how long it will take you to actually turn a profit or make back what you’ve invested

#3: How Will This Impact Your Taxes?

Being a landlord comes with a different set of tax expectations than just being a traditional homeowner. Make sure you include property tax estimates, as well as income tax on your rental income, in your financial projections. High property taxes could offset any revenue you bring in from the property each year. As a landlord, you also have a set of tax deductions you may be able to take advantage of. While you may have a positive or break-even cash flow situation, by factoring in depreciation, you could have a tax loss each year. Speaking with an accountant and financial planner to understand the numbers and what you need to do to remain organized for filing season is in your best interest.

#4: Do You Have the Right Insurance?

As a landlord, you’ll need to decide what type of insurance coverage you’ll need for your investment property. Although sites like Airbnb and VRBO both have some insurance protection for their hosts, your insurance company could potentially deny you coverage if they find out the property is being used commercially. You’ll also need to weigh the pros and cons of taking on a higher monthly premium that offers you broader coverage as a landlord versus skimping on coverage but having a high deductible. Note: As a financial planner, I’m going to go ahead and tell you to get the landlord insurance. Don’t take unnecessary risks here.

#5: Do You Have an Expanded Emergency Savings?

It’s beneficial to calculate the costs of replacing or repairing a few of your property’s big-ticket components. Think of worst-case-scenarios, then call around for estimates. A few worth looking at are:

  • HVAC
  • Roofing
  • Water heater
  • Plumbing (nobody wants a burst pipe or an out-of-service toilet, especially if you’re a renter)
  • Replacing major appliances if they go out

Knowing what some of these costs might be ahead of time can help you to set a reasonable savings goal. That account should be earmarked specifically for rental property expenses to help you avoid going into debt if you’re faced with an emergency.

#6: Are You Emotionally Ready to Be a Landlord?

Most people assume that renting out their property will be easy. In many cases that might be true, but life happens. Sometimes pipes burst in the middle of a holiday. Or your guest tries checking in after their flight lands late at night and can’t find the key. As a landlord or host, you need to be prepared to handle these situations in the moment. In some cases, you might find you can outsource this on-call duty to a property manager, but that’s an added expense you’ll need to keep in mind when deciding if this venture is a worthwhile investment.

Is A Rental Property Right For You?

Truth be told, for most people the answer to this question is a simple no. Rental properties are fairly trendy right now because of the prevalence of organizations like Airbnb and VRBO that make renting your home seem easy. However, for the majority of people, this investment just isn’t one that makes good financial sense. Rental properties can be time consuming, and often are more costly than they’re worth in potential revenue. However, there are a few cases where a rental property might work for you. I always tell clients you need to check four items off your list before moving forward with purchasing a rental property:

1. A financial plan that supports the property purchase and ongoing costs. This means you’ve estimated insurance, taxes, cost for upkeep and cleaning between guests or tenants, costs for updates, a sizable nest egg in case you need to do a major repair, and a down payment that offsets the financial burden of the mortgage.

2. Knowledge of the area. Purchasing a rental home in Hawaii when you’re landlocked in Nebraska probably isn’t in your best interest. It’s better to buy in your local area, or another area where you have a wealth of knowledge about the local real estate and rental market. You need to make sure this investment is going to turn a profit, and that means that property values have to be consistently on the upward trajectory and the rental market hasn’t experienced a slump in a while.

3. A purpose for the home. Do you want a rental home because it sounds like easy money, and you’ll have a cool place to vacation? That’s likely not a good enough reason. Purchasing a rental property means having a long-term strategy for the revenue. Are you using it to reach a savings goal? Or to invest? Are you planning to spend time on the rental property, or is for tenants only? Will the home require a lot of upkeep as the years go on? Do you have a solid exit strategy for when you’re done being a landlord? Having a purpose when purchasing your rental property and knowing your strategy going in is a must.

4. Time. Rental properties are a huge time commitment. The initial search and purchase, renovations to get the property renter-ready, ongoing maintenance, and renter interactions – all of these things are time consuming. I always tell people that if you’re not willing to get up in the middle of the night because someone has called about a pipe bursting in your rental property, you’re not ready to purchase one. Always go into rental property purchases knowing that they’re a time commitment, and make sure the return on your investment is worth the time you’re spending.

Are you considering a rental property? Don’t dive in without knowing whether or not it works for your unique financial situation. Let’s chat about whether a rental property will help you achieve your goals, or if there’s a different and better solution out there.

Mary Beth Storjohann, CFP® is an author, speaker, and financial coach who takes a fun, no-nonsense approach in working with individuals and couples across the country, helping them make smart choices with their money.

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