Thinking About Buying an Investment Property? Start Here. | Allworth Financial

Real estate can be a compelling addition to a long-term financial strategy. It’s tangible, it can generate income, and it has a way of making people feel like they’re doing something with their money in addition to investing in the stock market. But before you take the plunge and start imagining rental checks rolling in, it’s worth slowing down and getting clear on what an investment property really demands financially, emotionally, and logistically.

Below are the core questions every investor should work through before signing a purchase agreement.

1. What’s your actual goal for owning an investment property?

It sounds basic, but many investors jump in without articulating the “why.” Are you looking for:

• Monthly income?
• Long-term appreciation?
• A diversification play?
• A property you might eventually retire to?

Each goal leads to different purchase decisions. For example, if you’re focused on income, cash flow needs to be strong from day one. If appreciation is your priority, you may choose a location with strong population and job growth even if short-term rental income is modest.

Define the finish line before you start running. It’s a lot easier to choose the right property when you know what it’s supposed to achieve.

2. Can the numbers stand on their own?

This is where emotion needs to take a back seat. A rental property can be adorable, charming, or have a porch that makes you want to drink iced tea and contemplate life, but if the numbers don’t work, none of that matters.

Key financial considerations include:

Cash flow

Start with the basics: expected rent minus expenses. Expenses like vacancy, maintenance, repairs, property taxes, insurance, and property management fees. If it only cash flows under perfect circumstances, it doesn’t cash flow.

Down payment and financing

Investment properties typically require larger down payments and carry higher interest rates.

Reserves

A good rule of thumb: have at least 3–6 months of property expenses set aside. Tenants don’t pay rent on your schedule, roofs don’t wait for bonuses, and HVAC systems love to quit during heat waves.

Return expectations

After all expenses, what’s the actual after-tax return on the property? Compare this to what you could reasonably expect from a diversified portfolio to understand whether the trade-off in liquidity and effort is worth it.

3. Are you prepared for the responsibilities of being a landlord?

Some people love the hands-on nature of real estate investing. Others discover very quickly that they do not, in fact, enjoy calls about broken water heaters at 10 p.m.

A few questions to ask yourself:

• Will you manage the property yourself or hire a professional?
• Are you comfortable dealing with tenants, including late payments, complaints, and potential evictions?
• Do you have vetted contractors ready to handle repairs?
• Are you familiar with landlord-tenant laws in your area?

Hiring a property manager can remove much of the day-to-day effort, but it also reduces your net income. There’s no right or wrong answer. Just make sure the model fits your tolerance for involvement.

4. How diversified will your wealth be after this purchase?

This is a big one that often gets overlooked. Real estate doesn’t feel risky because it doesn’t show you a price every second of the day. But that doesn’t mean the risk isn’t there.

If buying a property means a large portion of your net worth ends up tied to one address in one city, that’s concentration. And concentration increases risk, especially if local economic conditions change or the rental market cools.

Ask yourself:

• How does this purchase shift your overall financial picture?
• Will this crowd out other important goals like retirement savings or building emergency reserves?
• Can your financial plan comfortably absorb periods of lost rent?

Investment properties should complement your broader plan, not dominate it.

5. What’s happening in the local market?

Real estate is famously local, so understanding neighborhood trends matters. A few areas to evaluate:

Population growth and employment

Growing metro areas generally support stronger rental demand.

Supply of rental units

New construction can increase competition and pressure rents.

Rent control laws

Some areas limit rental increases, which affects long-term income.

Property taxes and insurance trends

These have been rising in many states, and they directly erode cash flow.

This is where working with a knowledgeable agent is helpful. But remember: their job is to sell real estate. Your job is to work with your Allworth advisor to make sure the investment fits your plan.

6. How will taxes affect your bottom line?

Taxes can be a major advantage in real estate investing. Depreciation, deductions, and potential 1031 exchanges all work in your favor. But taxes can also surprise you if you’re not prepared.

Important considerations:

• Rental income is taxable.
• Repairs are deductible; improvements must be depreciated.
• Selling the property may trigger depreciation recapture and capital gains.
• If you plan to use the property personally, the tax rules change dramatically.

This is where your financial advisor and tax professional can help. A little planning goes a long way.

7. What’s your exit strategy?

Buying is exciting. Selling is…complicated. Before you commit, think through the scenarios:

• How long do you intend to hold the property?
• What conditions would cause you to sell?
• If the market softens, can you comfortably hold until conditions improve?

Real estate is illiquid by nature. Having an exit strategy doesn’t mean you plan to get out soon, just that you’re not winging it.

The Bottom Line

Buying an investment property can be a smart and rewarding part of a long-term financial strategy. But it is not passive, it is not guaranteed, and it is not for everyone. The right property should make sense on paper and in your broader financial plan. When both line up, that’s when real estate can become a meaningful contributor to long-term wealth.

If you’re considering taking the leap, let’s walk through the numbers together and make sure the investment supports your goals rather than creating new headaches. A thoughtful upfront strategy beats expensive surprises every time.

This information is meant for educational purposes and not as direct tax or legal advice. Rules and regulations can shift anytime, so it’s always best to consult a qualified tax advisor, CPA, or attorney for guidance tailored to your specific situation.