6 Things To Know Before Buying a Rental Property

Perhaps you’ve been reading lately about the lucrative powers of investing in real estate and how rental properties, in particular, can produce ample passive income. This isn’t untrue: Many investors make great money off of purchasing homes that will appreciate over time and renting them out to tenants.

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But buying a rental property, like any other investment, comes with risks, and you need to be well aware of the intricacies such an investment entails. GOBankingRates spoke with real estate and financial experts to find out the seven things you need to know before buying a rental property .

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The Realities of Your Budget — And How Expensive This Really Is

Though everyone should invest, you need to be in a financially solid place to do so aggressively. Buying a home isn’t akin to buying, say, a handful of penny stocks. It’s wildly more expensive, and you have to have a comfortably generous budget to cover basic costs. Don’t get in over your head, financially.

“Overextending yourself financially is one of the biggest risks for new investors,” said Slim Geransar, founder at REI Litics , a residential real estate research tool for prospective investors. “Factor in more than just the purchase price but also repairs, maintenance, taxes and unexpected vacancies.”

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The Details of the Location

If you can comfortably afford to invest in a rental property, you need to be sure to pick a good spot. Location can make or break your real estate investment.

“Look for areas with a growing population, growing job markets, good schools and low crime rates,” Geransar said. “These factors attract tenants and ensure steady rental demand. Don’t limit yourself to where you live.”

The Local Laws

Once you decide where to buy, you need to familiarize yourself with local laws regarding landlords and renters.

“Each state and city has different laws regarding landlord-tenant relationships, security deposits, evictions and rental agreements,” Geransar said. “Ignoring these can lead to fines or legal trouble. Look for landlord-friendly states to protect you from tenants who may pose a problem.”

The Tenant Screening Process

Be prepared to conduct a tenant screening process to do all that you can to ensure a prospective tenant won’t end up being a financial nightmare.

“Thorough screening reduces the risk of late payments, evictions or property damage,” Geransar said. “Don’t just focus on the highest rent — sometimes you may get a better tenant pool to choose from if you lower your rent when listing.”

The Tax Implications

Bear in mind that rental income, like any other income, is taxable. Whatever you get in rent, you’ll have to pay taxes on. Fortunately, you do have some tax advantages here, but none that will remove the tax burden entirely.

“Understanding what you can deduct — mortgage interest, repairs, depreciation — can save you a ton when it comes tax season,” Geransar said.

Your Insurance Needs and Costs

You need to invest in insurance for your rental property.

“Make sure you talk to your insurance agent and other agents to find out what the going rates are for the properties you want to own,” said Paul Gabrail, founder and host at Everything Money . “In addition, make sure you get extra umbrella coverage and lost rent coverage. It is all but inevitable that as a rental property owner, you will have an unexpected claim at some point and time. Make sure you understand what is being covered.”

Additionally, you need to protect not only your rental property investment by insuring it — but yourself as the landlord.

“Landlord insurance covers the building itself and any structures that are connected to it, like a shed,” said Nate Johnson, real estate investment expert and product manager at NeighborWho . “It can also help with court fees or lost rent. You can expect to pay 15% to 20% more for rental insurance than for regular homeowner’s insurance, based on how much the property is worth and where it is located.”

This article originally appeared on GOBankingRates.com : 6 Things To Know Before Buying a Rental Property