Five Key Tips to Investing in Rental Properties

1. Stay on Top of Your Personal Debt

Savvy investors tend to make sure they are not highly levered, especially prior to investing in any real estate property they intend to rent out. While all would agree that it’s not necessary to have 100% cash up front in many situations to make the property a great investment, it’s wise to try to pay down any personal debt you may have prior to, or after acquiring a rental property. Otherwise you may find that your expenses – especially something like a huge, unexpected medical bill – could cause you to pay a lot more in interest, thus losing profit, than you were originally seeking to.

2. Make Sure You Can Really Afford Your Downpayment

Whether you want to purchase a rental property for supplemental income, to diversify your investment portfolio, or as part of a longer-term investing strategy, it’s essential that when you decide to pull the trigger, you’re confident your budget can sustain the downpayment. This ties back to staying on top of your personal debt and other investments in your portfolio, but at the same time it’s a common mistake. You won’t be putting down 3-10% like you may on your personal home. With the minimum being 20% and if financing, you generally see it coming in the form of a personal loan, you can once again get into a rut with interest and possible refinancing if you can’t really afford the initial downpayment.

3. Stay Away from Financing with High Interest Rates

Comparatively in 2020, the cost of borrowing money has been very cheap due to economic factors from the COVID-19 pandemic, however in general loans with higher interest rates are best to avoid when looking to buy a rental property. Remember, you’re not going to get the benefit of a traditional mortgage interest rate, so be sure to stay away from personal loans (or other means of obtaining financing) that carry high interest rates.

4. Location, Location, Location

Investors already in the rental market are just starting to see prices stabilize, but only in certain “prime” locations. For example, if you look at various subdivisions of geographic areas within the Manhattan real estate market, you’ll find studios in the Upper East Side (for example) are now all above a ‘floor price’. However, if you look at similar studios in East Harlem, you won’t see the same uniformity. In fact, it’s very much to the contrary; there’s still high volatility in rental prices in ‘non-prime’ locations. To ensure your investment property is as immune as possible to market fluctuations resulting from uncertainty, the location of your rental property is essential to a successful return on investment.

5. Invest in Landlord Insurance; Assume Unexpected Costs

The two don’t necessarily go hand-in-hand (you should always assume unexpected costs), we wanted to recommend landlord insurance specifically on top of homeowners insurance. Landlord insurance generally covers property damage, lost rental income, and liability protection, in case a tenant or a visitor suffers injury as a result of property maintenance issues (for example). Depending on various factors of your rental property, the cost may be higher than you anticipate and you may be one of the people who thinks “this will never happen to me, so I don’t need it”, but in these cases it’s definitely better to be safe than sorry. Investing in a rental property is a big commitment and the landlord insurance certainly isn’t somewhere it’ll be worth it to cut costs in the long-term.