How to acquire and establish a rental property

Purchasing a second home to rent out can be a great passive investment idea: You buy a house, your renters pay off your second mortgage and you’ll have supplemental income from your tenants’ rent payments. An investment property is real estate that you buy with the intention of earning investment returns through rental income, flipping the home and/or through resale in the future.

Data released by the U.S. Census Bureau in 2017 shows that 47 percent of rentals were owned by individual investors, and rental properties can generate 31 percent of the average landlord’s annual income.

Purchasing a second house deserves some serious thought. After all, owning a rental property is more complex than plumbing in the occasional sink faucet or fixing the air conditioning when it collapses on the hottest day of the year. Here are a few considerations you might want to weigh before you take the plunge.

Initial considerations when purchasing a second property

Here are a few questions to ask yourself before you get serious about buying a second property.

Location matters

Remember, it’s easier to look in on a property across town rather than one that’s two or more hours away. True, you can always use a local manager to keep the home in tip-top shape but that’ll eat away at your monthly rental income.

Consider the full financial impact

How much money do you have on hand to make a down payment or even pay for the home in full? Don’t forget to calculate your approximate return on investment (ROI) before you purchase a property. Estimate how much income you’ll get from the property and what your expenses will be. Subtract your expenses from your income to find your net operating income.

There are also other fees to consider, including:

  • Insurance
  • Homeowners association fees
  • Utilities
  • Advertising
  • Travel expenses to and from the property
  • Cleaning, maintenance and repairs
  • Depreciation
  • Professional fees (legal and management fees)
  • Mortgage interest
  • Taxes

Know the laws

Do you know the laws when your tenants won’t pay up? For example, certain states require a grace period when your tenant is behind on rent. In other words, you can’t evict a tenant until the grace period is over but you can still charge late fees.

Know the laws in your state before you rent out your space and check out a few other things before you decide to rent out your home, according to NOLO:

  • Don’t use outdated rental lease forms or lease forms that don’t comply with the laws in your state.
  • Know about discrimination laws so you don’t inadvertently deny a family the rental home and possibly get slapped with a discrimination suit.
  • Act on what you promise your tenants, otherwise, they could sue you or withhold rent for not delivering on what you said you’d do.
  • Don’t violate tenants’ right to privacy.
  • Know the security deposit laws, particularly when you are allowed to keep the security deposit.
  • Resolve any dangerous situations in and around your rental property, such as a crumbling foundation or faulty steps.

Determine what you’ll do if you can’t rent it out

You’re not always going to be able to rent out your home. You might have trouble finding renters, you might have to rip up carpet and patch drywall. A family member might need a rent-free place to stay for three months, etc. In other words, there could be any number of reasons why income from your home may dry up. How will that impact your financial situation? Carefully consider what the implications will be if you really rely on that constant money flow.