Rental income can be an excellent way to make money, bringing regularly recurring revenue and tax benefits. Still, every business has a measure of risk, and success requires good preparation. The following tips for buying a rental property as an investment can help you to avoid pitfalls.
1. Determine Your Budget and Schedule Before Buying a Rental Property as an Investment
Your budget and schedule will influence every other decision on this list and affect whether you succeed as a landlord. Of course, the more time and money you can dedicate to your rental property, the sooner you can start turning a profit with your investment property.
Save as much as you can for a down payment to get better loan options. You also want to have cash set aside for repairs or other emergencies to avoid taking out higher-interest loans for less significant expenses.
Create a schedule to get an accurate assessment of your availability and determine how much help you need. As a result, you’ll understand when it’s more cost-effective to hire someone else for a task versus doing it yourself.
2. Research the Real Estate Market for Successful Real Estate Investing
Investigate the housing market to uncover the trends for home prices and to figure out what you can fetch for rental rates. This information can help you decide the best time to buy a house. Partner with a real estate agent specializing in rentals. Their expertise can help you analyze historical data and forecasts to understand home price trends and rental rates.
You should also consider who your prospective tenants are likely to be. Will you target families, college students, vacationers, or professionals who need short-term rentals? The choice affects your potential expenses and income, including how you need to furnish the dwelling and the cost of upkeep.
Additionally, compiling these details into a business plan can help you obtain financing. Lenders appreciate seeing a good strategy and are more willing to extend a loan or offer better rates when they see your preparation.
3. Understand Your Legal Responsibilities
Don’t forget that you’ll have to cover property taxes. Of course, you should factor that cost into what you charge for rent.
You must also follow fair housing laws and respect the rights of your tenants. Regulations govern the eviction process, appropriate amounts for security deposits, and lease requirements. It would be wise to discuss these points with a lawyer to understand your duties.
4. Find Out if You Should Partner With Someone
If this is your first rental property and you need financial or moral support, consider partnering with someone who has more experience. Having a partner to cosign your loan can also lower your financial risk.
Even if you don’t intend to team up with someone, consider joining a professional association or finding a mentor you can go to for advice. Their suggestions can help you avoid common mistakes.
5. Select a Location
Location greatly influences your rental fees and property value. Remember that when you find a property that seems like a steal of a deal. An otherwise outstanding home might be cheap because it is in a neighborhood that won’t attract reliable renters.
Optimally, try to buy in areas with an influx of construction, especially family-oriented neighborhoods, schools, and businesses. Your rental is more likely to remain occupied in a growing area and earn you better rates.
6. Decide on an Investment Property Type
Weigh the pros and cons of the types of property you can purchase. For example, a single-family dwelling should bring greater income but can require more maintenance. Still, while a condo or apartment can be a cheaper initial investment, you have to consider the community’s rules and dues.
Don’t forget about the option to purchase a multifamily dwelling that you can live in, too. You can keep a closer eye on the property, and this arrangement can allow you to purchase the home with a mortgage that has a lower interest rate.
You should also decide whether you’ll purchase a ready-to-rent property or a fixer-upper. Ready-to-rent homes are often better for new landlords. Though you might have higher initial costs, you can fill the place more quickly to start generating revenue.
A fixer-upper might be doable if you have the renovation know-how or a reliable company you can hire. Check out foreclosures to find great deals on these homes.
7. Calculate Maintenance Costs and Expenses
Every property is going to need continual care, so don’t underestimate the cost of landlord insurance, repairs, or upgrades in either time or money. A popular rule of thumb for renovations is to budget an extra 10% for unexpected costs. Count on spending at least 1% of a property’s value annually for repairs.
8. Manage Your Rental Property: Self-Management vs. Hiring a Property Manager
Rental property owners have to decide if they have the time and resources to address tenant complaints, schedule maintenance, and handle all the associated paperwork. If not, consider hiring a professional property manager, especially if you plan to purchase multiple properties. However, if you enjoy being hands-on and are a good communicator who can respond quickly to tenant needs and emergencies, you could manage the property yourself.
9. Secure Financing
Most people don’t have the cash on hand to purchase a property outright. Even if you do, you’re often better off keeping a bit aside for repairs and expenses and securing a home loan because credit cards and other credit lines usually have higher interest rates.
Talk with a loan officer to go through the preapproval process before making an offer to improve your odds of getting the real estate you want. Remember that if you’re buying a multifamily property that you’re going to live in, you could qualify for better loans with the FHA as a first-time buyer or a VA loan if you’re a veteran.
Remember, mortgage payments will be a significant expense for your rental property. Carefully calculate your monthly payments based on the loan terms and factor them into your overall budget. This ensures you have sufficient funds to cover mortgage payments, maintenance costs, and other essential expenses while still generating a positive cash flow from your rental income.
10. Know Your Exit Strategy
Smart real estate investors always have an exit strategy. Even if you plan to keep the property for life, consider how you’ll eventually pass it on to your heirs with minimal taxes or legal complications.
Furthermore, you should determine the circumstances where it makes sense for you to sell if that’s the more profitable course. Then, you can put the proceeds toward another property to grow your experience and portfolio.
Associates Home Loan: Providing the Tools You Need
Buying a rental property as an investment can be one of the best decisions you ever make. Fortunately, financing doesn’t have to be a headache. Chat with our friendly team at Associates Home Loan to determine your options for real estate investment loans.