4 Things to Consider Before Buying an Investment Property

July 24, 2024

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Owning and renting out an investment property can be a good potential source of passive income. But before jumping in, it’s important to consider some of the key aspects of owning a rental property and becoming a landlord.

1. Do your homework on what it means to be a landlord

As a landlord, you have to do whatever is necessary to ensure your property is clean, safe, and up to code. The maintenance and management of a property is often a full-time job.

If you’re a homeowner, you probably already know that maintenance can be expensive, especially when you need to make critical repairs. Issues with the HVAC, plumbing, or electrical system will inevitably arise over time, and they can result in costly bills.

In addition to maintenance, be aware that finding the right tenants and keeping them happy can cost time and money. For one, you’ll likely be on call for any maintenance or other issues that crop up during the tenancy. So be well versed in your legal obligations to your tenants, as rules vary state to state. Second, you might have to deal with renters who don’t pay on time.

There’s also the possibility that you may not be able to rent out your property right away, and prolonged vacancies can impact your bottom line.

If you know you won’t be able to handle the commitments by yourself, you may consider hiring a property manager or agency to oversee your investment for you. Keep in mind, however, property management fees eat into your rental income.

Property management fees vary depending on factors such as property type, location, and the services provided. On average, the fee can be anywhere between 8% and 12% of the monthly gross income of the property.

2. Make sure you run all of the numbers

Before committing to a rental property, you’ll need to calculate its potential return on investment. That means researching the local rental market and get a good estimate of your potential annual rental income.

In addition to the upfront purchasing costs for the property and any management fees (if you hire a property manager), other operating costs you’ll want to consider include:

Cost of insurance
Property taxes
Potential homeowner association fees
Utilities
Maintenance
Rental listings/tenant search

These are important numbers to factor in, so that you can get a sense of your net operating income, which is your annual rental income minus your annual operating cost.

It’s also not a bad idea to run these numbers through some potential worst-case scenarios where, for example, your property sits vacant for long periods due to market conditions.

3. Understand the taxes

You should understand your tax obligations as a property owner (e.g., property taxes, reporting of income, etc.). Your taxes can be complex depending on your situation – for instance, how you use the rental property and how you receive rent payments. Consult a tax professional to understand how the rules may apply to you.

Generally, you have to report your gross rental income on your tax return. You may be able to deduct certain expenses of renting your property from your gross rental income if you qualify. Common deductions may include things like mortgage interest, depreciation, and insurance. For more information, see IRS Publication 527 or consult a tax advisor.

4. Consider the reasons you’re buying a rental property

Ask yourself: What is your goal for owning a rental property? Are you trying to create a passive stream of income? Perhaps, you want to create income in your retirement. Or maybe you want to diversify your investment portfolio?

Whatever the case may be, this is where you may want to work with a financial advisor to determine whether owning and managing an investment property is the best way to achieve your goal.

While owning an investment property may seem appealing, it’s important to assess whether the potential return on investment is worth it after all operating expenses are accounted for and whether you’re financially stable enough to stay on top of your obligations as a landlord.

This article is for informational purposes only and shall not constitute an offer, solicitation, or recommendation. This article was prepared by and approved by Marcus by Goldman Sachs® but is not a description of any of the products or services offered by and does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article and it is not a substitute for individualized professional advice. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, or any of its affiliates, none of which are a fiduciary with respect to any person or plan by reason of providing the material or content herein. Neither Goldman Sachs Bank USA, nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.