The idea of having a property that makes money on itself without you lifting a finger is one that many people dream of. “We’ll just buy a property, rent it out, and it’ll pay off the mortgage and we’ll make heaps of cash”, is what many people say about a cash cow like a rental property. There are some truths to this, if done right, but there’s also a lot of reality that we’re missing. To bring you back down to earth, and to realise what you might actually be getting yourself into, we’ve put together some of the top things that you should know about buying a rental property.
We don’t write this to scare you out of buying; rather, the opposite! Rental properties can be extremely lucrative and can help boost your retirement savings and capital. But it is important that you know what type of work you can expect.
You’ll want a thorough budget
Let’s start with one of the most important things, first. Budgeting correctly for your own home is difficult but incredibly important, but budgeting for a second investment property like a rental is even more important. You aren’t just looking at whether or not you can afford the mortgage or having money set aside for a big repair, you also need to include what will happen if you don’t have tenants right away, or if you’re slapped with high taxes on the rent money you receive. Do your research, and talk with a financial advisor or even another rental manager if possible to get their insight.
Your budget will also need to include little things like when you have to hire out a carpet repair specialist in between tenants, or the cost of rental furniture to furnish a flat initially. Consider also the taxes on the building, like council taxes, as well as any utilities that you aren’t charging the tenant.
You’ll need to be able to pay two mortgages
The truth about rental properties is that there will always be a time when you’re paying two mortgages. Hopefully this is an occurrence that’s few and far between, but please make sure your budget is prepared for this. Even if it’s just one month in between one tenant moving out and another moving in, you should have plenty of room in your budget to cover this. We recommend having at least 6 months of the second mortgage covered, in case of long term repairs or a slow rental market. If you decide to work with a property manager instead of doing it yourself, they will likely have something written into the contract about what happens in these situations, and may cover you for a while.
You need to do a lot of research
The location and type of rental property you’re getting will decide what types of tenants you’ll get, so it’s something you need to think about. If you’re looking to attract students near a university, you’ll need a rental property that will suit them well, like small studio apartments that you can rent out at lower cost. Getting a rental appraisal will help you decide what rent you can get out of the property.
You might need renovations
If you aren’t buying a ready to move in property, be prepared to foot the bill for some reno costs. For easier renovations, you could consider doing them yourself too. Here’s a list of some renovations you might be able to tackle regardless of your experience. Basic renovations when buying a property might just be updating flooring or painting the walls, or it might be more extensive like replacing some plumbing in units.
You’ll need to write a lease
If you’ve never written a contract before, this one might seem a bit daunting, but it’s important to get right. You’ll want a strong lease that explains the ins and outs of the tenancy, as well as stating exactly what the terms and conditions are. It’s also important to include sections on what happens if a tenant needs to break the lease early, or other situations like that. That way, you both will be covered under the agreement.
You’ll be screening tenants
The tenants you have in your property should be responsible, pay rent, and alert you to any issues in the flat. It can be overwhelming to figure out who is going to be a good tenant, and still follow the tenancy laws at the same time. Here are some good tips for avoiding a bad situation with tenants.
Again, alternatively you could use a rental letting agent to take care of this for you. Many property management companies are well experienced in this process, and have access to background check software and may be able to perform a more extensive screening than you are able to.
You will be responsible for maintenance
Those midnight emergency calls about the toilet overflowing and the tenant can’t stop it are your calls to take now, good luck! In all honesty, these types of emergency calls won’t happen that often, but you will get calls about plumbing issues, something breaking, or other random maintenance often, and you’ll need to be prepared for it. If you’ve got a small property, it may be easy to keep up with the repairs yourself. For larger or multiple properties, you might need to look into hiring a maintenance company or person to manage the maintenance. If you’re lucky, you might also have a handy tenant in your property that could manage maintenance in exchange for reduced rent.
Okay, so maybe this is a lot to think about and it a bit scary, but if you can nail down these seven things than you’ll be in a lot better position to buy a rental property. Awareness is the most important thing, so simply being fully aware of the things that can go wrong and having a contingency plan for them will ensure that your rental property is a success, and that you’ll actually turn a profit from it.