This year I’m buying my first property which is why I’m always reading about buying both personal and rental properties. Today’s post from Holly T shares all the must-know info about buying your first rental property!
Buying Your First Rental Property
If you’re considering purchasing a rental property, it’s essential that you understand the depths of this commitment. While it can be a lucrative investment, rental properties come with a bevy of stresses that need to be measured before jumping in headfirst.
Don’t make the mistake of beginning the investment process without a solid knowledge base of the housing market and what will be required of you as a landlord.
While you likely have received advice from others who have made similar investments, it’s always a good idea to be able to draw on personal knowledge. Garnering this education might mean taking part in seminars, reading all you can find in books and online, and taking full-blown investment courses.
Learning everything you possibly can by reading articles, hanging out at real-estate forums Bigger Pockets, and listening to podcasts is essential to not making an expensive mistake.
Consider the Income
The first step is ascertaining what you could realistically seek to gain from your target rental property each year. When shopping around for a potential investment, it’s essential you look at comparable homes and find out what those property managers are making.
You need an accurate estimate of what you reasonably expect to take in with rental income, and also factor issues like vacancies and community competition into the equation.
Single Family or Multi-Unit?
Generally, the best first investment rental property is a single-family home in a residential area.
Condos are also a popular choice, but tend to appreciate more slowly. Single-family homes are often a safe bet because they attract long-term renters.
On the flip side, multi-unit homes require more capital but pay dividends in the long run. Maintenance costs are lower overall because of shared spaces, and multi-unit dwellings will appreciate at a much higher rate.
You’ll want to think through the pros and cons of each type of rental property and decide which type fits your investing vision.
Begin Your Rental Property Search
While you may be tempted to enlist the help of a real estate agent, this outside party can cause added pressure to the process and see you making a decision before you’re well and ready. Your first step is to consider the neighborhood.
If you plan on managing the property yourself, the investment needs to be close enough to your own residence. If you are leaning towards using a property manager, you can look further outside your immediate community.
Look at the property taxes required in the area you’re selecting and determine if you will be able to cover the costs required. When choosing a location, there are a multitude of other facets to consider: amenities that tenants will desire—think schools, bars, restaurants, the like—crime statistics, average rent rates, and the job market.
This is another area in which you can gain valuable insight. Talk to other homeowners, and approach current renters to get an accurate read on the housing market and desirability of an area.
You can begin by looking online at your local MLS to see what’s available in the area you want to invest in. You can research properties on several websites:
A good real estate agent that often works with investors in the area can guide you through this research and save you a ton of time. Since a real estate agent is usually only paid by the seller when a home is purchased, working with an agent to find a home is typically free for the buyer.
The Rental Property Financing Factor
The best way to buy property of course is cash, but this isn’t realistic for most buyers, especially for your first rental property.
Once you have a handle on the costs required with your investment, including maintenance and repairs expenses, you’ll need to tackle the mortgage details.
You’ll likely be required to put 20% or more down in most cases and depending on your credit history you may be required to pay a higher mortgage interest rate. Usually rental property requires a higher down payment since you won’t be living there.
Another facet to consider is the additional costs including legal fees, taxes, and stamp duties, especially if you are buying out of state.
Making Your Rental Property Purchase
When you’ve located a property that hits all the boxes on your checklist, never pay full retail price.
Your goal should be to secure the home at (at least) a 10% discount based on its current market value, especially if you’re going to be performing renovations to make it more attractive in the eyes of potential renters.
A killer real estate agent is the key to getting a good deal and securing the property at a good price.
The money made in real estate is made during the buying process so you don’t want to rush through this process. If you aren’t getting a good deal on the price of your rental property then you might have to walk away.
Do Your Due Diligience
Once you’ve found a house you want to purchase as a rental and settled on a price, you are not finished. This period is when you do your “due diligence” to make sure the sale will go through.
During this period you will perform all the typical things before buying a home including hiring an inspector and double checking for any defects or problems that will cost money later.
If you find something during this phase you can go back and renegotiate your deal assuming you had an inspection contingency (which you should).
During this time you will also finalize the financing you arranged earlier. During this time you will step back and allow the title company or attorney to finish up the transaction until closing day when you sign the papers and receive the keys to your first rental propery.
Make Improvements To The Property
unless it was included in the seller’s list of things to do, you’ll probably want to freshen up the property once you take possession of it.
Walk through the house with the eyes of your future tenants. What areas might cause problems? What apartment essentials can you provide? Where can easy and cheap improvements be made? It’s best to do things on the front end and save the hassle late.
Most renters expect a neutral and newly painted home so you will likely have the property painted at the very least.
Great Rental Tenants are Key
Once you’ve made the investment and spruced up the rental property, it’s time to place reliable tenants.
Finding great tenants makes or breaks the landlord experience.
It’s essential that you take the time to find the right fit, as renting to bad tenants can cost you thousands of dollars, hundreds of headaches, and even court litigation in the worst of circumstances. Always show your place to multiple tenants, make it attractive through competitive pricing and modern updates, and use vetted tenant check systems. Services will give you access to all the essential bits of information; from credit history to past evictions and even notice of criminal convictions.
If you’re ready to take the plunge and make an investment in rental properties, cover your bases with these essential steps and reduce your risk while increasing your income bottom line.
