Becoming a landlord can generate rental income and diversify your portfolio, but it also comes with risks.

Owning real estate can be appealing. With an investment property, there’s the real possibility of receiving regular monthly income while also gaining equity on a significant asset. 

However, being a landlord also takes a lot of work and a reasonable tolerance for risk. For first time investors a good way to start is by buying an investment property to use as your first home. But regardless of what type of property you ultimately choose, before you get an investment property loan, you should know the answers to these four questions that will help you determine whether becoming a landlord is right for you.

1. What are your basic responsibilities as a landlord?

There are both pros and cons to investing in income properties. As a positive, you can collect a monthly income simply by having renters live in your property, and the value of your property could appreciate, helping you grow your net worth. Also, some expenses associated with the property may even be deductible from your income taxes.

On the other hand, a property can also depreciate, depending on the housing market. Finding tenants will be your responsibility, and the amount you’ll be able to charge for rent can fluctuate, so you’ll want to stay well informed about the market’s ups and downs.

2. What is the right type of investment property for you?

Choices include condominiums, apartments, townhomes, single-family homes, multi-family homes and even commercial or retail spaces. Some factors to consider when deciding on the best type of property include the following:

• Cost: How much can you afford to spend on the investment property?
• Maintenance: No matter what type of property you invest in, it will need to be maintained. Consider how much immediate and ongoing maintenance a property might require before you purchase.
• Rental income: In some areas, commercial spaces can command higher rents, but in others, residential spaces may be the better investment.

3. Where do you want to buy?

You should do as much research as possible before investing in an income property. Many factors can come into play when finding a property and deciding on a reasonable monthly rent for your tenants. Some of the variables you should take into consideration include the following:

• Property taxes
• Crime data
• Proximity to schools, hospitals and shopping (“walk score”)
• The number of similar rental properties
• Average rental prices for comparable properties

4. How will you finance an income property?

While there are certainly some cash buyers, you’ll likely take out a mortgage in the form of an investment property loan. As with any loan, you’ll need to supply personal information about your annual income, assets and credit history, as well as other various documentation.

It’s important to compare several loan types such as conventional fixed-rate mortgages versus adjustable-rate mortgages. Also, talk with multiple lenders before you decide on a loan. If you already own a personal residence, you may be able to use a home equity line of credit to help finance an investment property.

Becoming a landlord may be a smart financial decision and a way to increase your net worth over time.

Continue reading to learn more about mortgages and investment property loans.