If you buy an investment property, you stand to make money from any appreciation in the property value, and also from the rent you would collect from your tenant. At the same time, you’re taking on a financial risk. You are responsible for paying the mortgage, repairing damage and finding a suitable tenant.
Typically, investors will borrow money in order to buy an investment property, so it’s a type of investment that usually comes with a lot of leverage. This gives you higher peaks, but it also gives you lower troughs. Before the collapse in the property market around 2007, investors would buy homes on cheap credit, and amass property after property using very little of their own money. When the property market collapsed, many lost it all, and that’s because they had too much leverage.
If your rental income covers the cost of your mortgage – which is in no way guaranteed – you will own all the equity in your property by the time the mortgage is fully paid off, and you won’t have spent any of your own money. On the other hand, you risk being saddled with a tenantless property that could depreciate in value, and drag down your credit rating in the process. When things become too much, some unfortunate landlords lose their own home because they fail to make payments on a second home.
There are landlord-tenant laws in every state, and they each place different requirements on landlords. In most states, the landlord is responsible for keeping the house in a livable condition, which can quickly become very costly and bureaucratic, much more so than most people realize before they get involved.
According to guidance published by the California Department of Consumer Affairs, for example, landlords renting to Californians are responsible for seeing there are “working smoke detectors in all units of multi-unit buildings, such as duplexes and apartment complexes. Apartment complexes also must have smoke detectors in common stairwells.” Landlords are also responsible for seeing that there are “ground fault circuit interrupters for swimming pools and antisuction protections for wading pools in apartment complexes and other residential settings.”
Landlords also run the risk of having to do major repairs, such as replacing boilers and fixing structural problems in the building. These types of changes can easily wipe out profitability for many years into the future, so it’s always good to have a reasonable capital buffer before you get started. Unless you can afford to pay the mortgage for over one year without a tenant, you probably don’t have sufficient access to capital in order to be in a safe position.
“Buying a home to rent can be an overwhelming decision, but it can be a very rewarding experience as well,” said Mortgage lender AmeriSave. “For many Americans, becoming a landlord is a very enjoyable and rewarding experience. Make sure to do your research properly, and look for markets where you see the potential for strong growth and robust returns.”
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