Though housing inventory across the country – including in our corner of Chicagoland – continues to be low…we have seen many buyers interested in investing in the purchase of a rental property.
When we have clients that come to us ready to invest in a rental property purchase, we talk through the risks and rewards of rental property ownership to ensure an educated decision is made.
Understanding the Risks and Rewards of Rental Properties
Potential Risk:
- Rental income may be decreased by maintenance and/or property management expenses
- Monthly mortgage payment may exceed monthly rental income, impacting profitability
- Real estate is not a liquid asset and may take time to sell down the road
Potential Rewards:
- Income is passive
- If real estate values increase, so can the profitability on the investment
- Rental income is not subject to Social Security tax
- The interest on an investment property loan may be tax deductible
How to Financially Prepare for Your Investment Property
When our clients have made the decision that buying a rental property is the right move for them, we offer guidance on saving for and financing the business endeavor.
- Save for a 15-20% down payment. Lenders will typically require a larger down payment for investment properties compared to primary residences. Some conservative savings strategies our clients have had success with: automate savings, increase income and/or reduce expenses, pay off high-interest debt, and take advantage of a high-yield savings account.
- Create a cash reserve. It’s advisable that rental property owners have a cash reserve that can cover unexpected repairs and vacancies in the home. Ideally, enough to cover at least 3 months of mortgage payments.
- Strengthen your Credit Score. Maintain a minimum credit score of 620—though 740 or higher is ideal. Underwriting standards can be stricter for rental property applicants, so a healthy credit score and DTI (debt-to-income ratio) can help buyers get better rates and terms on financing.
Ready to strategize the purchase of your own rental property? Let’s talk!