When it comes to investing, purchasing rental property can be a great way to diversify annual income and expand your retirement strategy. The right investment should increase in value over time, while also serving as a reliable source of passive revenue.
Rental property can also be a winning investment strategy because it is a tangible asset, says Douglas Dupont, Bank of St. Francisville’s Vice President of Commercial Lending.
“Having something tangible in hand is very beneficial,” says Dupont, “especially if down the road you want—or need—to sell it.”
Owning property has plenty of upsides, including several tax benefits, but it also comes with new considerations and responsibilities. Dupont suggests potential buyers do their due diligence and keep the following tips in mind before taking the plunge.
Location, Location, Location
The old adage about location being a top consideration in real estate holds true for rental property, according to Dupont. “More than likely, you’re better off buying in a neighborhood that has a lot of energy, including a good commercial and retail presence,” he said. “Renters are usually going to prefer areas that are convenient rather than isolated.”
Understand the tax advantages
There are numerous tax deductions and benefits that come with owning rental property. Owners can write off expenses related to: maintenance, improvements, mortgage interest, property taxes, and depreciation—the hypothetical wear and tear on the building each year. Dupont recommends meeting with your CPA to discuss details about these and other tax advantages, as well as how you should keep records throughout the year.
Of course, you will need to carry hazard insurance on rental property, but depending on the physical area you buy in, you might also need flood insurance. “Given the growth of natural disasters and incidences of flooding, it’s important that buyers don’t try to cut corners on insurance,” said Dupont. Rental property owners might also consider carrying some form of liability insurance to reduce exposure from renters and their guests.
Expect the unexpected
While rental income can be generally passive and predictable, owning rental property requires planning for unexpected costs and losses. Set aside funds each month for sudden or extended vacancies. And plan on experiencing occasional spikes in maintenance costs. “Issues are going to pop up that will minimize profit during a particular year,” said Dupont. “It’s important to have cash reserves to pay for things like HVAC, electrical and plumbing repairs, and tenant damage.”
Head Over Heart
When it comes to rental property, Dupont emphasizes: Always buy based on the numbers, and not on your emotions. This means comparing the average rental rates to your mortgage and monthly expenses. “You might fall in love with a building or condo because you find it really charming,” he said. “But unless the numbers look good, it’s not worth it as a piece of investment property.” Dupont advises getting an independent inspection on the property so that you know exactly what you’re buying and what the long-term maintenance costs will be.
Want to speak with a lender about exploring your options? Click HERE to make an appointment.