Table of Contents
- Can You Afford the Ongoing Expenses?
- Is the Location Ideal for Rental Income?
- Do You Have the Time and Resources to Manage the Property?
- Bottom Line
Purchasing an investment property is a major financial decision with the potential to generate passive income, offer tax benefits, and build long-term wealth. However, not all properties make good investments. To ensure your new investment is profitable and manageable, it’s essential to ask the right questions before committing. The decisions made early on can have a lasting impact on your success as a landlord. JTS Property Management has put together this article to help landlords and aspiring investors make informed choices. Here are three critical questions to ask before purchasing an investment property.
Can You Afford the Ongoing Expenses?
While most buyers focus on the purchase price and securing a mortgage, the long-term success of your investment depends on covering ongoing expenses. Beyond the mortgage, which includes principal and interest, property taxes and homeowners insurance are major costs to consider.
Property taxes can vary widely by location and may increase over time as the property appreciates. Insurance for rental properties is often more expensive than standard homeowner’s insurance due to the additional liabilities.
In addition to these predictable costs, it’s important to account for less obvious expenses like utilities, especially if you are responsible for water, electricity, or gas on the property. Be sure to research any HOA fees or special assessments in the area, which can add to your monthly obligations.
You’ll also need to think about the cost of legal support for drawing up lease agreements or handling disputes with tenants. It’s always a good idea to have a financial buffer to cover legal fees in case issues arise.
Maintenance and repairs are inevitable, even for properties in good condition. Regular upkeep such as landscaping, pest control, and general repairs should be anticipated. Additionally, set aside a portion of your rental income for unexpected repairs. Having a financial buffer, often referred to as a "rainy day fund," is crucial.
Vacancy periods are another key consideration. Every landlord experiences vacancies, and you need to be financially prepared to cover mortgage payments and other expenses during these times. Ideally, have enough savings to weather these gaps. Finally, if you hire a property management company, factor in their fees, typically ranging from 8% to 12% of your rental income. While this is an extra cost, it can save you significant time by handling tenant issues, maintenance, and legal matters.
Is the Location Ideal for Rental Income?
The success of your investment property depends on its location. Even a well-maintained property won’t generate strong rental income if it’s in an undesirable area. Start by assessing the economic stability of the neighborhood. Is it growing, with new businesses and jobs, or is it in decline? Locations near business districts, industrial hubs, universities, or hospitals tend to attract tenants due to employment opportunities.
In addition to economic factors, it’s crucial to examine the local lifestyle and culture. Some areas may be more attractive to families, while others may cater to young professionals or retirees. Understanding the tenant demographic that your property will appeal to helps you price the property correctly and avoid prolonged vacancies.
Proximity to amenities and public transportation is also important. Tenants value convenience, so properties near grocery stores, parks, schools, and public transit can command higher rents. In suburban or rural areas, consider drive times to essential services.
Neighborhood safety is another top concern for renters. Properties in low-crime areas are more desirable and easier to rent out, while properties in high-crime areas may suffer from higher vacancy rates and lower-quality tenants.
Local rental demand is crucial as well. Assess vacancy rates and the types of available properties to gauge whether there’s strong demand for rental housing. If the market is oversaturated, you may face longer vacancy periods and stiff competition. Additionally, keep an eye on future development in the area, as new infrastructure can boost property values, though too much development may change the neighborhood's character.
Do You Have the Time and Resources to Manage the Property?
Owning an investment property isn’t a passive activity. Managing the property requires time, energy, and effort. Tenant management involves advertising the property, screening applicants, handling lease agreements, collecting rent, and responding to maintenance requests. Consider whether you have the time to manage these tasks or if you'd prefer to delegate them to a property management company.
Beyond tenant relations, property maintenance can take up more time than expected. Whether it’s routine tasks such as landscaping or responding to emergencies like burst pipes, landlords must be ready to handle issues promptly to avoid property damage or tenant dissatisfaction. Assess your ability to handle the stress of managing multiple requests, especially if you plan to own more than one property.
Finally, familiarize yourself with local housing laws, tenant rights, and building codes. These regulations vary by location, and failing to comply can lead to fines or legal action. If managing these responsibilities feels overwhelming, hiring a property management company may be the best option. While it comes with a cost, it can save you time and reduce stress.
Bottom Line
Purchasing an investment property requires careful consideration. You need to ensure you can cover ongoing expenses, choose the right location, and decide if you have the time to manage the property effectively. By asking yourself these three critical questions, you’ll be better positioned to make informed decisions that lead to long-term success.
JTS Property Management is here to assist landlords through every stage of the investment process, offering tailored services that maximize rental income and minimize stress. Contact us today to learn how we can help you succeed as a property owner.
