Investing in real estate may be an effective way to diversify your portfolio and help improve the overall return on your capital. However, there are many variables that you’ll need to consider before purchasing a rental property. These include the location of the property, your ability to obtain a mortgage and whether you are ready to become a landlord.
How to determine if a property is in a lucrative location
Ideally, a rental property will be located near a beach, a nature park, a vibrant city scene or a major highway. These attractions will make your rental more attractive to prospective tenants, which will allow you to charge a higher rental rate. In addition, a home or other real estate located in a popular area is less likely to be vacant for long periods of time.
Can you obtain a mortgage?
Lenders typically require borrowers who are buying rental properties to make a down payment of at least 20%. They will also need to have credit scores of at least 620 and debt-to-income ratios of less than 45%. Furthermore, you may need to have cash reserves equal to at least six months of expenses.
Should you be a landlord?
Being a landlord may not be a good idea if you aren’t handy or don’t live close to your rental property, The same is true if you don’t have sufficient cash reserves to pay for repairs, routine maintenance or other costs related to owning a home.
Owning a rental property may come with financial and other types of risks. It may be possible to mitigate these risks by thoroughly vetting a home before you buy it. This process will include having the home inspected and reviewing disclosures made by the seller.