When you purchase a home, the biggest expense you’ll take on is your monthly mortgage payment. But what if there were a way to help offset that cost each month? Enter buying a tenant-occupied home or deciding to rent out part of the property.

Income properties allow for passive rental income, which provides a great way to help reduce your monthly expenses. However, there’s a lot to keep in mind before you decide to become a homeowner and a landlord in one fell swoop. We spoke to the experts about what you should know before purchasing a potential income property or an existing tenant-occupied property. 

Balance Your Head and Heart

“Buyers should purchase a home with their heart—after all, a home is personal to them, and them alone,” says international real estate agent and author Sean Woolley of Cloud Nine Spain. Compare that with an income property, which Woolley says should be purchased based solely on financials (in other words, with your head).

According to Woolley:

“Problems can arise if buyers are looking to purchase a home with the intention of renting part of it out because there’s often a conflict between head and heart. A degree of compromise needs to be factored in: for example, buying a property that appeals to the mass rental market may not accord with your own personal wishlist. A balance that satisfies both emotional and financial needs is often hard to find.”

Still, Woolley shares it is possible to find that perfect property; you’ll just want to factor in more time to find it and be sure to pair up with an experienced Realtor with plenty of market knowledge.

Run the Numbers

If your mortgage is $2,000 and you charge $750 for a rental unit or accessory dwelling unit on your property, your net payment is $1,250, right? Not so fast. Brian Davis, a real estate investor and co-founder of SparkRental.com, urges would-be buyers to approach passive rental income with an investor’s mindset rather than a homebuyer’s mindset. 

“Most people don’t understand landlords’ expenses, so new landlords tend to just look at the gross rent rather than subtracting for expenses like a vacancy rate when a tenant moves out, ongoing repairs, maintenance, accounting, bookkeeping, and any management labor,” he says. Davis suggests using SparkRental’s rental property cash-flow calculator to run the numbers with all expenses included. “The net rental income from your accessory dwelling unit or other unit probably isn’t as much as you think,” he says. 

Fort Lauderdale-based Realtor and seasoned flipper Omar Reiner concurs. “A good rule of thumb to consider is that expenses end up eating about 40 to 50 percent of the gross rental income,” he says. Remember that $750 figure presented at the start of this section? That becomes more like $300 to $375, using Reiner’s estimate.

According to Reiner:

“While it sounds obvious that an income property should provide income, many times rental property owners don’t do proper due diligence before buying a property, become tired landlords, and then end up selling the property for a loss."

Get to Know Landlord-Tenant Laws

Many experts shared that landlord-tenant laws vary state by state, and they aren’t static—it’s your job to stay abreast of any changes. Knowing the laws can help you avoid legal hassles and fees as well as your obligations when it comes to eviction rules, fair housing, security deposits, and lease requirements. 

If you’re purchasing a tenant-occupied property, even more rules and laws apply as the lease is tied to the property and not simply the owner. This means the existing tenants have the legal right to live in the property until their lease term ends. What’s more, in most cases you won’t be able to raise the rent, modify any terms of the lease, or evict tenants until the lease term expires.

Prepare to Pay More

“Landlord’s insurance is more expensive than homeowners insurance,” says real estate insurance expert Karen Condor. “Statistically, rental properties have a higher frequency and severity of claims than primary residences; that higher risk translates to higher insurance cost,” she says. Condor also implores buyers to go with an insurer that specializes in rental properties—you’ll want to make sure you have the best coverage, not just the lowest price.

Think Long-term Before You Buy

If there’s one piece of advice to share, it’s that “life changes in ways we don’t expect it to,” says financial wellness expert Shawn Beyers. You might purchase a property with room for a renter, or a property that’s already tenant occupied, but Breyer suggests having a plan in place if you ever need or want to move. Before you buy, make sure the area you’re looking at has several property-management companies to choose from.

According to Breyer:

“If you move away and can’t manage the property by yourself, you don’t want to be stuck with poor options. A bad property manager can result in losing money every year. Or, if the company you go with sours over time, you want to be able to switch easily to a new one.”

Even if you don’t move, you’ll need to keep in mind that having tenants means you’ll be more hands-on. “Unless you own many properties and the economies of scale allow you to outsource the management, you’ll likely be managing the income property yourself,” says Omar Reiner. The reality is harsh but worth knowing up front: “It’s time-consuming and can be frustrating,” Reiner says.