10 Concepts You Should Know Before Buying Investment Property

 

Investing in property can be a great way to build wealth and generate income, but it's important to understand the basics before making a purchase. Whether you're a first-time investor or looking to expand your portfolio, knowing key concepts can help you make smart, informed decisions. In this guide, we’ll walk you through 10 essential ideas that every property investor should know before buying an investment property.

 

1. Should You Buy or Finance a Rental Property? Here’s How to Decide

When it comes to investing in rental real estate, one common question is whether to pay in full or take out a mortgage. While some financial experts believe you should only purchase rental properties with cash, Jeremy Kisner, Senior Wealth Advisor at Surevest Wealth Management in Phoenix, offers a different perspective.

“Using leverage meaning financing with a mortgage can amplify your investment returns, both positively and negatively,” says Kisner, who personally owns two rental homes in Las Vegas.

To illustrate, consider buying a rental property for $100,000 in cash. After covering expenses like maintenance, insurance, and a $1,000 tax bill, the property brings in $12,000 annually in rental income. Factoring in a 27.5-year depreciation schedule and a 20% income tax rate, the investor nets just over $9,500 per year. That’s a solid 9.5% annual return on investment.

2. Location
The area where you purchase a property greatly influences the kind of renters you'll attract and how often the unit may sit vacant. For instance, if the property is close to a university, your tenant base is likely to consist mainly of students, which could lead to higher vacancy rates during summer breaks.

Additionally, some municipalities make it difficult to convert properties into rentals by charging high permit fees and creating burdensome administrative hurdles.

3. Decide if owning a rental property is a good fit for you
Owning an investment rental isn’t as simple as TV might make it seem. It takes a sharp eye for finances, a solid understanding of rental laws, the ability to anticipate potential issues, and if you're managing the property yourself a balance of professionalism and people skills.

Before jumping in, assess whether you have the time, dedication, and capability to handle the responsibilities. While rental properties are often labeled as “passive” investments, they still require active management. You’ll be expected to handle maintenance, tenant relations, and the day-to-day operations of a small business. It also takes a sizable financial commitment to get started. It's not the right path for everyone.

4. Property Taxes

Property tax rates can differ significantly depending on the area you're considering.
While high property taxes may be justifiable in desirable neighborhoods that attract stable, long-term renters, there are also less attractive areas with similarly high tax rates.

You can obtain detailed tax information from the local tax assessor’s office or by speaking with residents. It’s also important to check whether tax increases are likely in the near future. If the town is facing financial trouble, it may raise property taxes to a level that landlords can't reasonably offset through rental income.

5. Crunch the numbers before buying
If you plan to rent out the property, it's important to estimate your potential rental income. Research is key—look into what similar properties are renting for to get an idea of market rates.

For residential rentals, websites like Zillow make this easy. You can browse listings to see what other landlords are charging, compare prices per square foot, evaluate property quality through photos, and assess how appealing the location is. This will help you determine a reasonable rental price for your own property.

6. Crime Rates
Living near an area known for high crime isn’t appealing to most people. To get reliable crime data for a neighborhood, consult state and local government websites, police departments, or your public library. Look into statistics for both major and minor crimes, including vandalism, and pay attention to whether crime is increasing or decreasing.

It’s also worth inquiring about how often police patrol the area.

7. Evaluate if you're cut out to be a landlord
If you're buying a rental property, consider whether you want to manage it yourself or hire a property management company, which typically charges 6–10% of the rental income. There's no one-size-fits-all solution, but George and Kisner recommend outsourcing.

“They handle tenant screening, lease agreements, and rent collection,” George explains. “That lets you focus on managing your finances instead of dealing with property and tenant issues.”

Kathy Hertzog, former president of LandlordAssociation.org in Erie, Pennsylvania, warns that self-managing a rental can come with significant challenges.

8. Job market

Areas with growing job opportunities generally see an increase in renters. To evaluate job availability in a specific location, you can refer to the U.S. Bureau of Labor Statistics (BLS) or visit a local library. If a major company is moving into the area, it’s likely that workers will seek rental properties nearby, though the type of business could affect local housing prices. If you're comfortable with the company’s presence, your tenants are likely to be as well.

9. Understanding Rental Laws: Tenant Security Deposits

It’s important for rental property owners to understand state and local landlord-tenant laws to avoid costly mistakes, as Hertzog points out. For example, handling tenant security deposits involves more than just collecting and holding the money. Proper bookkeeping is required, with each tenant’s deposit kept in a separate account. Additionally, security deposit laws outline the timeframe for returning the deposit at the end of the lease, minus any deductions for cleaning or repairs, all of which must be clearly itemized.

10.  Future Growth
The municipal planning department is a valuable resource for information on any developments or plans that have been officially zoned for the area. When you notice significant construction activity, it often signals ongoing or upcoming growth in the region, which can be a positive indicator for property value appreciation. However, it's important to remain cautious about new developments, as they might introduce factors that could negatively impact the price of surrounding properties. For instance, an overabundance of new housing units in the area could result in increased competition for buyers or renters, potentially lowering the demand for your property. Additionally, certain types of developments (e.g., industrial or commercial projects) might alter the neighborhood's character, which could influence property values, either positively or negatively. Always monitor proposed zoning changes and development plans to assess the long-term impact on your investment.