Things to consider before investing in a rental property

Real estate has long been considered one of the best investments a person can make. Even though buyer confidence might have waned somewhat in light of the recent economic swoon and its impact on the housing market, many investors still view real estate as a solid investment.

Among the ways people invest in real estate is to purchase a rental property. Rental properties can provide income for landlords long after the mortgage has been paid off, and the potential for such income into retirement is a motivating factor for men and women who want to invest in real estate. But investing in a rental property is not for everyone, and there are a host of factors potential investors should consider before deciding to become a landlord.

* Approval: Getting approved for a home loan for a home you plan to live in is different than getting approved for one when you don't intend to live on the property. Lenders don't necessarily frown on non-owner occupied homes, but they do make it harder to secure loans for investment properties. Interest rates tend to be higher, and many lenders ask for higher down payments than the standard 20 percent for more typical home loans. However, buyers who want multi-family units and intend on living in one of the units should be able to qualify for a more traditional owner-occupied loan, which will likely mean a lower interest rate and a more typical down payment.

* Taxes: Homeowners gain certain tax exemptions, but those exemptions do not always apply to investment properties, which could make the cost of an investment property even more than investors anticipate. The tax burden of an investment property may prove considerable, and some investors might not be able to manage such a heavy burden. In addition, mortgage relief programs, such as those that arose during the recent recession, typically exclude non-owner occupied properties, so investors might find themselves in financial hot water should another recession occur in the future and the investment property lose value as a result.

* Tenants: Though some real estate rental markets, such as those in densely populated cities, are extremely competitive and advantageous to landlords, the rental market in general can be hard to predict. A significant number of renters are college students and young professionals, and one byproduct of the ongoing economic woes has been the decision by many young people to save money by living at home while in college or returning home once they have earned their degree and entered the job market. Another byproduct is a poor job market that has little to offer to young and inexperienced professionals, who can't find work and subsequently cannot rent their own apartments.

When considering investing in a rental property, think about your prospective tenants. Are there enough of them to allow you to create a competitive market wherein you can charge a rent that will put a significant dent in the mortgage? Are there enough potential tenants to allow you to be choosy and establish minimum income requirements, or will you likely be forced to accept any and all comers just to pay your mortgage? If the potential tenant market does not inspire much confidence, then that should be a red flag to prospective real estate investors.

* Help: Few people who invest in a rental property can handle the job on their own. Making repairs or finding tenants often requires the help of a professional, and those people are likely to cost money. Men and women who aren't especially handy won't want to pay a plumber to fix a tenant's sink or a repairman to replace a cracked floor tile when such issues inevitably arise, so you may have to offer a discounted rent to tenants who can pull double duty as a superintendent to all of the units within the investment property. Especially large units, such as apartment complexes, may require a full-time superintendent, whose salary must be paid by the owner of the building.

Another helper a prospective landlord may need is a property management agency that helps landlords find tenants when there are vacancies. Vacant rental properties can negatively affect a landlord's finances, as landlords rely on rental income to pay their mortgages. As a result, many landlords enlist the services of a property management agency to ensure their properties are well marketed when there is a vacancy. These agencies typically list and show the property, and some will even oversee repairs. But like a live-in manager or a full-time superintendent, property management agencies are an expense and one that prospective investors must learn about and calculate into their budgets before buying an investment property.

Investing in a rental property can be a sound business venture that pays substantial dividends down the road. But such an investment isn't for everyone, and prospective investors should make their decision as informed as possible before buying a rental property.