Monday, January 28, 2008

Ask the Expert - Should I Buy Investment Property?

Question: I have the funds to buy a rental. How do I decide if I should be a landlord?

Answer: Before you buy any investment, you need to ask yourself some basic questions. First, are you emotionally prepared to be a landlord? If the toilet starts to leak on a Friday night, will you be willing to cancel your weekend plans so you can meet the plumber out at the property? If the tenant stops paying rent, can you handle the emotional upheaval that comes with an eviction?

The second question you must ask is whether or not you are financially prepared to carry the cost of owning property for at least three months. There will be times when the property is vacant or when repairs are needed. This will require you to come "out of pocket" to cover these expenses. You simply can not assume the rent will always be there. If you do not have a reserve from which you can draw when problems arise, you will soon find yourself in financial trouble.

Next you need to consider what type of property to buy. This will be dictated, to some extent, by your finances. Assuming you are looking at a small investment property (1-4 units), you need to decide if you want a multi-family or a single family home. Multi-family units are more expensive to purchase and maintain. However, the vacancy risk is spread out over a number of units. For example, if you have a single family home as a rental, when it is vacant, all your rental income is gone. If you have a duplex and one unit is vacant, you still have rent coming in from the other unit. On the other hand, the more units you have, the more maintenance is required, both in terms of managing the property as well as managing the tenants.

If this is your first rental, you may want to consider a condominium. You will have to pay homeowners dues, but you will be relieved of many maintenance issues such as gardening, roof, exterior paint, etc. Before you buy, make sure to check whether or not the Homeowners Association restricts the number or type of rentals. If you don't, you may find that you have purchased a home that can not be rented.

It's hard to manage property and harder to manage people. Of course, you can always hire a property manager. But that becomes an additional expense that must be factored in to the cost of ownership. And you need to be prepared to manage the manger. The bottom line is, you must approach real estate investing as a business. And, as such, it requires research to make sure you know what you are getting yourself in to, both financially and emotionally.

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