8 Tips for Buying Rental Properties as an Investment
The Federal Housing Finance Agency (FHFA) reports that since 2000, the national average rate of home appreciation has been 4.7%. If you calculate the average from April 2021 to April 2022, it was 18.8%!
While these numbers are enticing for any investor, the real estate market has its ebbs and flows similar to any other market. But even when the market contracts, property values typically continue to appreciate year over year.
So with that said, is buying rental property a good investment?
We certainly think so, as long as you follow some advice. Learn eight tips for buying a rental property as an investment.
1. Do Your Research
Contrary to popular belief, real estate investing is not passive income. Although rental property investing is an excellent way to make an income because of its tax benefits and deductions, there is nothing passive about it. There are plenty of tasks you need to accomplish, such as:
- Searching for properties and buying them
- Marketing available properties and finding renters
- Collecting rent payments
- Property management
- Scheduling maintenance and repairs
While you can work with real estate agents and property management companies to assist you, there is still a lot of hassle. If you can’t manage the property, entering the rental market may not be for you.
Instead, you could invest in real estate investment trusts (REITs). REITs offer a way to invest in real estate without owning, operating, or financing rental properties. It’s similar to investing in the stock market.
However, if being a rental property owner is for you, consider your investment goals and what kind of property you want to purchase. Single-family homes and turnkey properties are great options for your first rental property. It’s wise to have some experience in real estate before investing in multifamily properties.
2. Choose the Right Location
Location plays another role, and that is how you, the homebuyer, make money. You want an investment property close to the essentials like grocery stores, good schools, and public transportation. After all, premium locations fetch the highest rent prices. The location will also help determine your target audience when finding tenants.
3. Choose the Right Type of Financing
Even if you have the funds to buy investment rental properties outright, taking out a mortgage may be in your best interest. Although you’ll be responsible for mortgage payments and interest, the return on investment (ROI) is higher when you use less money upfront. Making a down payment of 20% instead of paying 100% of the property’s value could nearly double your ROI.
While mortgage interest rates are higher now, you can cover the cost in the monthly rent payment. Borrowers with good credit scores can still get favorable mortgage rates from lenders.
When financing, research the different loan options and lenders. You may qualify for an investment property loan rather than a standard mortgage loan you would take out for your primary residence. For instance, a buy-and-hold loan is available for those who want to purchase and renovate a property before refinancing with a conventional mortgage.
Whichever loan you choose, always seek preapproval before making an offer on the property. This improves your chances of closing on the property and helps reduce the need to refinance.
4. Consider All Possible Expenses
The initial costs of buying a property include the purchase price and closing costs. But you also must consider the following:
- Homeowners association (HOA) fees
- Homeowners insurance
- Maintenance costs, repairs, and general upkeep
- Operating expenses
- Vacancy rates
Also, don’t forget to include taxes when calculating expenses. This includes property and rental income taxes, the second of which you pay on your yearly tax return.
Considering all these expenses, you can better gauge your operating income.
5. Know Who Will Manage the Property
To minimize costs, you can manage the property yourself. But it’s a hefty task. You need to live close by and be available on short notice. It’s a full-time job.
Hiring a property management company can help you care for all the gritty details and handle emergencies. It’s an investment but makes owning rentals effortless.
6. Know the Math
Many factors go into analyzing which property to buy. Your goal in the rental market is to make a steady profit. Thus, you need to know how much to charge for rent. You may consider using the 1% rule as a guideline. The rule states that the monthly rent should equal or exceed 1% of the purchase price (plus repairs or renovations).
For example, if you buy a property for $200,000 and spend $50,000 on renovations, your investment is $250,000. According to the 1% rule, you want to make at least $2,500 monthly. This simple calculation can help you understand the risk and potential gain of the properties that interest you.
Cash Flow and Appreciation
Something else to consider is property value. Appreciation is how much the value of a financial asset increases over time. In this case, how much the home value increases year over year. Typically, the higher the cash flow, the slower the property appreciates. Conversely, the faster the property appreciates, the lower the cash flow.
Many investors err on appreciation, but this is a decision you’ll need to make based on your personal finance goals. Property depreciation (or losing value) is possible in the short term if you choose a higher cash flow, but it isn’t common in the long run.
7. Plan for Unexpected Costs
Many first-time real estate investors don’t consider the unexpected costs of owning a rental. For instance, what is your plan when the toilet starts to overflow, ruining the bathroom and surrounding carpet floors?
Ensure you set aside a percentage of the earned income to cover unexpected costs, like an emergency fund.
8. Know Your Legal Obligations
When you get involved in rental real estate, you must become familiar with the landlord-tenant laws of the property’s location. These laws explain tenants’ rights and outline your obligations concerning the following:
- Fair housing practices
- Lease requirements
- Security deposits
You and your tenants must always follow the law.
Get the Funding You Need to Invest in a Rental Property
With some real estate savvy and our tips, buying a rental property as an investment can yield excellent returns. If you’re ready to enter the real estate market to get some great returns, apply now for a mortgage from The Associates Home Loan of Florida.