There are many advantages to owning rental property, including the tax advantages you can enjoy while the mortgage on the property is being paid down. If you manage properly, you can take that rental income tax free all the years you are paying off the mortgage. Then when the mortgage is paid off, the property is yours free and clear.
You can also pull out tax-free money if you refinance after the property has appreciated and interest rates have fallen. If you sell the property and reinvest the money in another property, you may be able to avoid paying taxes on the sale.
But even with these advantages (as well as the many others) this kind of investment can turn into a disaster if you don’t take some precautions:
Expectations. Keep them reasonable. Positive cash flow is one thing; purchasing a new Mercedes by year’s end is another. If you don’t control your expectations, you may be tempted to push rents too high in which case, you’ll probably lose your tenants. Your rental rates must be realistically competitive.
Your Contribution. If you’re a handyman and are prepared to do a lot of work, you’ll probably get along fine. If you’re not, you’re going to have to consider hiring a property management firm, which has to be figured into your outgo-income ratio. For some people, the income may not be so attractive if they have to take on another full-time job to get it. Most property management firms will take this over for a percentage of the rental.
Rules and Regulations. You have legal responsibilities and liabilities, and ignorance does not qualify as an excuse for failing to abide by them. You need to do some reading. It’s better than spending that time (and more, probably) in the courtroom.
Property Inspection. Have this property inspected before you buy it. It will cost a little and very well may save a lot.
Leases. Make certain they are legal. It’s very difficult to sue a tenant for a violation if the requirement is not in the lease.
Check out Your Renters. Take your time to be sure your prospective renter is not a deadbeat. Check him out. Run references and credit checks. Go by the place he’s living now; you may find some valuable information about how he’ll treat your property.
Insurance. Make certain you have the right kind. Find an insurance professional you can trust to help you work out your package.
Emergency Fund. There will be unexpected expenses-you can count on it. An emergency fund of 20% of the value of the property is a good rule of thumb. If you can’t do that much, do something. Take the income from the property and get it invested in this fund before you spend any of it.