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Purchasing a rental property in Chicago can be quite lucrative if you’re willing to put in the time and money it may require. Buying a home for rental income has a different set of parameters than buying a home to live in, so here are some aspects to consider that will help to make this decision smooth and stress free.
Are you willing to get your hands dirty?
Essentially when you own a rental property, you’re not only the owner but the landlord, handyman, gardener, plumber, house cleaner, and banker. All repairs needed in the home are your responsibility. Are you prepared to jump into action when the phone rings? Granted, you can hire a property management company to field those late night phone calls from tenants, and you can hire a handyman or contractor to be on call to handle repairs. However, these services will eat into your profits. Be sure you’re either prepared to get your hands dirty or are prepared to share your profits with a property manager and contractor when considering a rental property.
Do you have a contingency fund?
Prior to purchasing a rental property, it’s a good idea to be relatively debt free with a contingency fund tucked away for unforeseen repairs. If you have a tenant in the property and something breaks, it needs to be fixed immediately. If you buy a property but don’t find a tenant right away, you’ll need to cover the monthly mortgage payment. Going into this purchase with a high level of debt and no savings can be a recipe for disaster.
Not your typical mortgage
Applying for a loan to purchase an investment property is a bit different than applying for a loan to purchase a home you’re going to live in. Typically, when buying an investment property, the lender will require a down payment of 20% since mortgage insurance is not an option for this type of loan. Additionally, the mortgage rates will be higher for an investment loan than a traditional mortgage, so it’s a good idea to shop around and see what the best loan would be for your scenario.
Avoid a fixer-upper
As tempting as it may be to purchase a fixer-upper for your first rental property, you have to know what you’re getting in to. A fixer-upper may takes months to renovate and inevitably will cost more money than purchasing a house that only needs minor repairs. The goal here is to have the property ready for renters as soon as possible to expedite your cash flow.
Location, location, location
The money that goes into buying a rental property is one thing to consider, but so is the location of the property. Find something in a location that is highly desirable to potential tenants, and take into consideration school districts, crime rates, the job market in the area, and the amenities the neighborhood has to offer. The more desirable the location, the more a prospective tenant will want to live there.
Finding the right tenant
Finding the right tenant is perhaps the most challenging part of being a landlord. It’s important to be vigilant when interviewing prospective renters. Ask for references, do a credit check, look into their eviction history, and verify employment. Have a clear lease in place, complete with details of the rental terms so there is no confusion down the line.
Purchasing a rental property can be a great investment in the long term. As with any investment, you’ll want to make a sound decision and keep your expectations realistic. Tell us about your first rental property.