Investing in rental properties can be a great way to build wealth, generate passive income, and diversify your portfolio. But before you get into real estate investing, there are some important elements to research and consider. Whether you’re a first-time investor or adding to your property portfolio, here are 8 key things to consider before buying a rental property.

1. Location, location, location

The location of a rental property can make or break your investment. Areas with strong job markets, good schools, and growing populations tend to have higher demand for rental properties. Look for neighborhoods that offer desirable amenities such as parks, shopping, and easy access to public transportation. Also, consider the proximity to universities or corporate hubs, as these areas often have a steady stream of potential tenants.

2. Rental demand

\Gauge the demand for rental properties in the area where you’re buying. If there’s a shortage of rental homes, you’re more likely to fill vacancies quickly and keep your rental rates competitive. You can research rental demand by checking local rental listings, speaking with property managers, or using online tools like Zillow and Rentometer to see average rent prices in the area.

3. Cash flow potential

Cash flow is the net income you earn from a rental property after deducting expenses like the mortgage, property taxes, insurance, and maintenance costs. You want a property that will generate positive cash flow, meaning the rental income is greater than your monthly expenses.

Use this formula:
Cash Flow = Rental Income – Expenses

4. Upfront and ongoing costs

Before purchasing a rental property, think about the upfront and ongoing costs. Upfront costs are the down payment (typically 20-25% for investment properties), closing costs, and any necessary repairs or renovations to make the property rent-ready.

Ongoing costs are property maintenance, property management fees (if you hire someone to manage the property), utilities (if you’re responsible for them), and unexpected expenses like repairs or vacancies.

5. Financing options

Buying a rental property often requires different financing than buying a home to live in. Most lenders require a larger down payment (usually 20% or more) and charge higher interest rates for investment properties. Shop around for the best mortgage terms, and consider whether you qualify for any special financing programs, such as FHA loans, which may offer lower down payments for multi-family rental properties.

It’s also important to understand your debt-to-income ratio—the percentage of your income that goes toward paying debts. Lenders will evaluate this ratio to determine your ability to take on additional debt for a rental property.

6. Property management

Decide early whether you plan to manage the property yourself or hire a professional property management company. Managing the property yourself can save money, but it requires a LOT of time and effort to handle tenant issues, maintenance requests, rent collection, and more.

7. Market trends and appreciation potential

What’s the property’s long-term appreciation potential? Over time, a well-chosen property in a growing market can increase in value, allowing you to sell it for a profit or refinance for better terms.

Research market trends in the area, like population growth, employment rates, and future development plans. These indicators can clue you in on whether property values are likely to rise or decline in the coming years.

8. Legal considerations

Get to know local landlord-tenant laws. These laws govern issues like security deposits, eviction procedures, and tenant rights. Being unaware of your legal obligations as a landlord can lead to costly fines or legal disputes. You also need to make sure the propertie complies with all safety and zoning regulations, like fire codes and building permits. A real estate attorney or local housing authority can help you look at all the legal requirements.