The Economics of the Modern Income Property by John Lusink

If you’ve kept up-to-date recently on the latest real estate news, you probably came across several headlines mentioning AirBNB, a website that’s received an increasing amount of press recently. AirBNB is a site that connects travelers who need lodging in their destination city with individuals who have available residential space and who are willing to provide it for a fee. For travelers, staying in someone’s apartment or home provides a cheaper and arguably more authentic way to experience a new city compared to the traditional route of staying at a hotel.

Now the original intention of the site was pretty anodyne – connect hosts with travelers. However, as the site has grown in popularity in the past several years and as people have discovered that they can make a tidy profit from renting out their property on AirBNB, to the ire of city governments and hotel chains everywhere, it’s led some people to buy residential property, like a home or a condo, solely for the purpose of listing it on the website. City governments claim that this growing trend is leading to an artificial and unfair increase in rents, but that’s a topic for a separate discussion.

Regardless of whether city governments have a valid point, I think this subject provides a neat segue into a broader discussion on the risks and rewards associated with buying a residential property for investment purposes. Buying a property for investment purposes means that you intend not to live in the new property, but either rent it out or “flip” it for (hopefully) a nice chunk of change.

Here’s the thing – we all know that buying a residential property is a major investment. But, buying a property for investment purposes carries with it a whole new layer of complexity, as well as additional risks and questions that need to be asked before you make the big investment plunge.

With that said, here are some basic tips on what you need to consider prior to purchasing an investment property.

Before You Buy Anything, Ask Yourself What You’re Going to do with the Investment

Property The first step in purchasing an investment property is determining what type of

investment you’re going to turn the property into. Are you going to immediately resell it for a profit? Are you interested in something more long-term in which you’ll rent out the property to tenants? Make this determination first before you do anything else.

If you’re going to Rent Our Your Property, Then Create a Proposed Profit vs. Cost Model Okay, so you decided to rent out your investment property. If that’s the case, then prior

to deciding what property to buy, make sure that the numbers add up. Will the rent the tenants pay you, combined with any associated home owner costs, be less than the mortgage you owe on the house after its purchase? If so, then you’ll have a failing investment on your hands. So, before purchasing a property, take a look at the average rent prices in the area you’re looking at and compare these to the average mortgage rates. If the numbers are uneven, then consider looking for an investment property in a different area.

If This Is Your First Investment Property, Then Stay Local If you decide to rent out your investment property, that doesn’t mean you can

wipe your hands clean of it once you find reliable tenants. Actually, it’s quite the opposite. You own the property and now you’ve become the landlord. That means that it’s your responsibility to fix any repairs that the property may need and resolve any issues the tenants may have with the property. So, unless you have an assistant to handle all these tasks, buy a property that is close enough for you to conveniently drive to.

Always Have Emergency Funds On Hand This is a fundamental rule for all home buying experiences, regardless if it’s for an

investment purpose or otherwise. We all know how costly owning a home can be. And remember, even if you’re renting out a home, you’re not only responsible for any home repair costs; you are also still responsible for any associated home owner fees. Therefore, make sure you have enough capital set aside to cover fees and unexpected costs.