The Pros and Cons of Buying an Investment Property Now

Among the first factors to consider: What could happen to change the balance of supply and demand? Lots of nearby construction of multi-family housing would be a red flag, for instance. Or, could your tenants suddenly become prospective buyers if the economy continued to improve? That could reduce the demand for rental properties, driving rents down.

To assess a potential rental property, start with the Rent vs. Buy Calculator. This is normally used by people trying to decide whether to rent a home or buy one, but its results are useful for the prospective investor as well. If the calculator shows that buying makes more sense, it means rents are high relative to property prices, suggesting an investment property could be profitable.

The Internet also offers a number of calculators designed specifically for the investment property shopper, such as one from AARP. Note that all calculators require the user to put in numbers that are uncertain, like inflation, appreciation rates, rental income, expenses and tax deductions. It pays to experiment with a variety of forecasts, and to buy only if the investment promises to be profitable under weak conditions as well as strong ones. It would be foolish, for example, to assume you could raise rents 10% a year forever, even if they have gone up that much in the past year or two.