How Can You Make Sure You're Financially Ready to Invest in Your Next Rental Property

Posted in Blog  
  on Dec 17, 2015

If you’ve had a good experience with your first rental property, you may be thinking about purchasing another. But while a successful stint as a landlord is definitely a good sign that you’re prepared to take on another property, it’s important to remember that all the same financial risks that came with your first purchase still apply. Consider these important factors to make sure you’re truly financially ready to buy your next rental.


Cash Flow
From a month-to-month standpoint, the most important thing to consider is whether your cash flow can support a new investment, even above and beyond saving for the initial down payment. Ideally, you’ll have enough free cash flow saved up to pay for both (or all) of your rental properties entirely on your own for at least three months. That kind of buffer ensures that you won’t be caught off guard if you have difficulty securing quality tenants for the new property, or even if you lose your existing tenants at the same time. In short, you need to make sure you can cover catastrophic scenarios for all apartments simultaneously, or risk falling into debt.


Additional Costs
It’s crucial to remember that you’ll incur most of the same additional costs during a second property purchase that you did for the first property. Of course you’ll need to calculate the “always expected” costs of things like property and income tax for a new property, but you also need to include all the incidental and one-time costs that might arise.
Use your experience with your first rental property to estimate a broad window for how much you’ll require in repair and renovation costs when purchasing an additional property. You’ll also want to keep in mind any advertising or brokerage costs that might be required to find quality tenants in your area.
In general, it’s a good idea to sit down and make a list detailing every penny you spent on your initial property during its first one to three years, then make sure your cash flow or savings can accommodate at least that amount for an additional property. If you had an especially easy time of things the first time around, you’ll want to be more pessimistic in your calculations, and assume for safety’s sake that you’d need to spend more with a new property.


Assessing the Market
Beyond your own finances, one of the biggest factors to consider is whether your local market is a good choice for renting at all. Nearly every city has a very active rental market, but you need to confirm what the exact state of that market is, and how it may have changed since your first purchase.
Accordingly, you need to do all the research you did the first time around. Look at how many active vacancies exist, what the going rental rate is, and how long the average apartment stays vacant. If any of those factors have soured since your first purchase, you’ll need to adjust your plans for cash flow accordingly, and may need to delay the new purchase entirely.
Once you’ve ensured that you can support not only the purchase price and mortgage, but also all additional expenses and worst case vacancy scenarios, you should be well on your way to expanding your rental property portfolio.

 


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