Renting out a property can be a productive, convenient form of passive income, although it doesn’t come without effort. But before investing in a rental property, you need to make sure you’re financially prepared for even worst-case scenarios.
The novel COVID-19 pandemic is one of those worst-case scenarios, bringing financial distress and uncertainty to landlords and property owners across the country and globe.
With flights grounded, vacations canceled, and business travel postponed across the world, one subset of this industry especially affected are Airbnb property owners. With the sudden drop in travel, Airbnb property managers have had to refund already-paid deposits and reservation fees to customers who are now unable to travel due to COVID-19.
Many are struggling to meet the basic costs of monthly payments and utilities for properties that are normally turning a profit, and some owners are left with no other option but to sell. It’s worth researching what it takes to be financially prepared to invest in a rental property. Here are some factors and tips to keep in mind.
Renting Out a Property
There are many factors, both foreseeable and unexpected, that can affect homeowners and landlords. It is important to know the potential risks involved with an investment before going all in to ensure that you’re prepared to weather less-than-ideal circumstances.
One major thing to consider before buying a rental property is whether or not you can affordably make the mortgage payments and pay any bills comfortably, even in the event that you have no renter.
Whether you own a vacation home or a long-term residential property, you want to ensure that you can make your payments on time and without difficulty before deciding to buy.
The best-case scenario is, of course, owning a rental property outright. Although you still have to pay taxes and manage other upkeep costs, having no monthly payment hanging over your head decreases your financial risk. However, if you are renting while still paying off the property, there are things you can do to safeguard your investment.
If you’re relying on rent income to pay off a monthly loan, you should have at least several months’ rent saved to protect you against the inability to find tenants, financial crises like the one caused by COVID-19, and other unforeseen disasters that might occur.
You should also ensure the rent you charge fully covers your loan payment, taxes, utilities, and other costs, while still offering a competitive price for your area. Research current rent prices in your market to determine what you can afford to charge while still attracting desirable tenants.
Potential expenses to keep in mind include property insurance, vacancy costs if you go any length of time without being able to find a tenant, and the cost of a property manager if you don’t want to be responsible for maintenance and other responsibilities yourself. You also need to consider unpredictable expenses that may arise, such as repair costs.
Property Assessments and Maintenance
It is recommended that you visit the property on a regular basis to examine its current state and ensure there is no property damage. This can be done either personally or through a property manager. If there are unexpected costs or repairs, a well-connected property management company could also provide connections to companies who provide the materials for repairs and replacements.
Cost of Finding New Tenants
If you plan on renting out property, the possibility of bad tenants is one that every landlord attempts to avoid, but is likely to encounter. Careless tenants will cost more in repairs and replacements, while flaky tenants will have you constantly chasing after late rent. Finding new tenants results in advertising costs, background check costs, and lost profit if your property sits empty while you search.
Work with a Property Management Company
There are many compelling reasons to buy a rental property, but before buying, be sure to choose the property according to your own budget and ability to create a good investment.
By carefully analyzing your own budget, ensuring you have adequate savings to protect against setbacks, and being fully aware of the other costs that come with renting out property, you can ensure you are more financially prepared to buy a rental property.