Investing in a Rental Property

Investing in rental property has become increasingly popular in recent years.  That’s not surprising if you consider the potential rewards: you can not only generate rental income, but also profit from increasing housing prices. 

But success as a landlord requires more than collecting rent checks and riding the real estate market—there’s real work involved, and substantial risk as well.  Here are some tips that can help you make an informed investment decision.

Do the math

Unlike a primary residence, a rental property isn’t an emotionally driven purchase—it’s an investment.  And as an investor, you should think about it primarily in terms of profit and loss, risk and reward.  Whether you come out on top will depend mostly on two factors:

• Cash flow.  Consider how much rent you can collect each month, and how much will be left over after mortgage payments, maintenance costs, and other expenses. 
• Appreciation.  Rental-property owners can’t rely only on appreciation to make their investments profitable, but it certainly can help. 

Evaluate the market

Like any other business, rentals are subject to the basic forces of supply and demand.  If apartments are in short supply, you probably won’t have trouble filling yours.  When you are trying to generate positive cash flow from a rental property, vacancies are perhaps your greatest enemy.  They cost you money and generate no income in return.

Your first line of defense against vacancies is a good evaluation of the rental market before investing.  Talk to Realtors and property managers in the area, and check the frequency of rental listings in the local paper.  Keep in mind that certain neighborhoods, such as those near schools or universities, may have higher demand for rentals than others.

Prepare for the commitment

Owning a rental property is more than an investment—it’s a business.  You have to be willing and able to commit the time and resources necessary to run your business successfully.  Whether you are actively involved in the day-to-day operations or hire someone to manage them for you, make sure you understand how much time or money you will have to spend before you invest.