Like any other business, becoming a landlord and acquiring rentals requires proper planning. You'll need to learn how to efficiently locate rental investment properties and attract ideal tenants if you want to succeed. You also need to know how to maximize your investment dollars as you grow your portfolio. A 1031 Exchange can be a key piece of that puzzle. Below are some tips to know when investing in rental properties.
Focus on Cash Flow
When investigating rental properties, it's important to keep cash flow in mind. This is especially critical if the property you are buying will have a mortgage, as there must be enough on the backend to cover maintenance, taxes, and provide a profit. Rental income is obviously a great way to build some extra financial security and put money in the bank. But if you don't crunch the numbers just right, you may find yourself coming up short or dipping into your own pocket to pay the bills.
Tap Into Appreciation
The value of real estate property rises over time. This implies that as the price of your home rises over time, you'll make more money and be able to pay off your mortgage sooner. You may also sell your property for a reasonable price at a later date. While it has ups and downs, real estate investment has always had an upward trend for the last several decades.
Location, Location, Location!
When it comes to rental properties, location is key. A bad location will result in vacancies and a good location will make your property easy to rent. The best locations are always in high demand, so try to find a happy medium between price and location. Look for areas that are close to public transportation, schools, parks, and other amenities that families or young professionals would want.
Be Prepared for the Unexpected
Just like any other business venture, things may not always go as planned with rental properties. There will be months where you have no tenants and you'll need to carry the mortgage yourself. In these cases, it's important to have some cash set aside to cover the bills. You should also be prepared for maintenance and repair costs. While you can't predict when something will break, you can create a fund to cover these costs when they do come up.
Maximize Your Tax Benefits
Rental properties come with a number of tax benefits that can save you money come tax time. These include deductions for mortgage interest, property taxes, and more. You may also be able to utilize a 1031 Exchange as you grow your portfolio. This allows you to defer capital gains on the sale of a property so that you can reinvest the funds into a new and potentially higher-yielding property. Be sure to speak with a tax professional to learn more about how you can maximize your rental property's tax benefits.
The Bottom Line
Rental properties can be a great way to build wealth, but it's important to go into the venture with your eyes wide open. There are a number of things to consider, from cash flow and appreciation to location and taxes. But if you do your homework and prepare for the unexpected, you can be a successful landlord.
Have additional legal questions about investing in real estate or 1031 Exchanges? We are here to answer your questions. Contact us at 888-508-1901 to schedule a consultation.