How to buy a rental property (and the things you need to know before buying)

A community of townhouses.© Studioaltius/Getty Images

By Peter G. Miller, Bankrate

In the COVID-19 economy, buying rental property raises many questions investors have never had to ask before. While the demand for rental units remains strong, new and changing pandemic rules mean investors have to weigh acquisitions carefully. While the general numbers right now are attractive - lower vacancies, higher rentals and cheaper mortgage costs - not all markets are the same.

How to buy rental property

Given so much uncertainty, is now the time to invest in real estate? There's no one answer, because real estate is a localized commodity and markets differ. Old assumptions about tenants - that they will pay their rent and have the financial capacity to make such payments - are no longer so clear. Buying rental property at this time requires a look at new considerations and realities.

1. Look for investment sellers

Owners with cash-flow problems may be interested in selling rental units to pay off debts and increase financial reserves. Owners discomforted by the new rules and changing economics may feel that now is the time to sell.

2. Play by the new rules

Use traditional tips and strategies to consider the purchase of a rental property, but modify bids to account for today's new realities. This includes assessing whether to buy the property outright with cash, if able, and budgeting for periods when tenants may be struggling to make rent payments. Be sure you have sufficient reserves to carry the property if tenants run into financial difficulties.

3. Find an experienced lender

Work with a lender who handles single-unit investment properties, and get their advice regarding financing options. Be realistic when you consider property costs and expenses, projected return rates and the risks of ownership.

4. Look for overnight rentals

Currently, the market for short-term rentals has declined as travel restrictions and worries have hobbled the hospitality industry. However, many of today's overnight rental properties started out as single-family homes. With good money from short-term rentals, such properties have become more valuable, and have impacted home values in major cities.

5. Get professional expertise

It's always smart to work with knowledgable brokers and attorneys when buying, selling or operating rental properties. In the COVID-19 economy, rules are changing on the local, state and federal levels with unusual rapidity. Real estate professionals can help you sort through the new standards and avoid costly mistakes.

Benefits of a rental property

The ownership of rental real estate has been a traditional source of wealth. As a long-term investment, many have done well with real estate. The reason is that real estate offers a number of benefits:
  • Rental properties with one to four units can be readily financed and refinanced with residential mortgages instead of more costly investment financing.
  • Rental properties with two to four units can be used both as personal residences and as rental property at the same time. Buying such properties is often a good way to get into the rental business.
  • Rental property is associated with a number of significant tax benefits. You can write off mortgage interest, property taxes, property insurance and other costs. Because of depreciation, it's often possible to have both positive cash flow and an accounting loss for tax purposes.
  • Rising home prices can increase owner equity over time. In communities with rising property values, many rental owners have been able to get the benefit of increasing home prices as well as mortgage balances that fall each month.
  • As values grow, rental properties can be refinanced to free cash for other uses and purposes.

Risks of a rental property

There's no investment that's a sure thing - they all have risk.
For rental property, there are several to be aware of:
  • The property might be vacant for an unknown length of time.
  • It can cost big money to fix up and maintain a home.
  • Tenants may damage rental property.
  • Local property values can decline.
  • The property may be subject to rent control in certain areas.

Bottom line

No one knows how long the coronavirus will continue to impact the economy, how long recovery will take, what additional federal actions will be approved and how much higher unemployment will go. Such factors mean that investors need to look at rental properties with a new, strategic focus.

See more at Bankrate

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Finance Magazine: How to buy a rental property (and the things you need to know before buying)
How to buy a rental property (and the things you need to know before buying)
It’s smart to work with brokers, lenders and attorneys when buying rental property.
Finance Magazine
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