Purchasing real estate can be a great way to generate extra income as well as build up valuable equity as a part of a plan to build long-term wealth. However, those who are inexperienced in owning and managing rental homes often run into pitfalls along the way. Here are three common problems faced by new rental property owners and how you can avoid them.
Buying a Fixer-Upper
Although purchasing a home that needs serious repairs can be tempting because of the price tag, it's best for first-time rental property owners to buy houses that don't require a great deal of fixing up. Never offer reduced rent to tenants in return for performing repair and maintenance tasks. In most states, certain residential repairs have to be done by licensed contractors -- making a deal with a tenant could have legal repercussions, and you'll have no guarantee that the work they do will be up to local and state codes.
Not Paying Enough Attention to Location
You should always look at the neighborhood where you're considering buying rental property through the eyes of a renter. If the home you're thinking about buying is suitable for a family, you need to check into the schools -- if they're subpar, you might have difficulty attracting quality tenants. You should also look at nearby parks as well as consider the general atmosphere of the neighborhood and ask yourself if you would live there with your family.
On the other hand, if you're thinking about buying a small, one-bedroom cottage suitable for a single person or perhaps a young married couple, you should take a close look at the property from their point of view. Is it in a walkable neighborhood close to amenities that most young, childless people enjoy, or is it situated deep in the suburbs?
Another very important issue to consider concerning location is the rental vacancy rate of the neighborhood in question. If vacancy rates are high, you should be prepared to lower your standards concerning acceptable tenants as well as to have the place sit empty from time to time.
Counting on Rental Income for Basic Living Expenses
Counting on rental income for living expenses is risky, and many who decide to go this route find themselves in financial difficulties when things don't go as expected. Tenants can decide to stop paying rent for a variety of reasons, and having to pay for necessary repairs can put property owners in the hole as well.