Posted: 9 July 2018
Are you considering purchasing your first rental property?
If so, who can blame you? After all, real estate has produced some of the wealthiest people on the planet.
If you study the depths of their fortunes, it’s more than likely they have, at one point or another, invested a large portion of their money into real estate. The fact is, investing in real estate has the ability to turn huge profits.
But, like any investment, you’re going to want to ensure that you have educated yourself on all of the facts. From here, you can decide if investing in real estate is the right choice for you and how you’d like to move forward.
Before even considering investing your money into your first rental property, you’re going to want to make sure that you’ve read this guide.
We’re uncovering the ten must-know tips for buying your first rental property.
1. Arrange Your Finances
First things first, you’re going to need to ensure that you are in good enough financial standing to purchase a home.
Remember, unless you are paying for the home in all cash, you are going to need to qualify for a mortgage loan. This can be done through banks, mortgage lenders or sometimes personal loans.
In order to qualify, you will need proof of income, an adequate credit score, and a downpayment.
Also, consider that the downpayment requirements for a home are very different than the downpayment requirements for an investment property. Investment properties can require as much as 20% down in order to qualify for a mortgage.
Be sure to speak with a mortgage professional to ensure that you can qualify for a mortgage prior to beginning your search.
2. Be Aware of Higher Interest Rates
While the cost of borrowing may sound cheap, be mindful of the fact that investment properties carry higher interest rates than traditional interest rates.
This is important when it comes to comparing your monthly mortgage payments to your monthly rental profits.
Ideally, you want your mortgage payments to be lower than your rental profits. This helps to ensure that you are not losing money each month.
3. Find the Right Real Estate Professional
Making sure to hire the right real estate professional may be one of the most important decisions you can make when searching for an investment property.
After all, a good versus bad realtor could be the difference between finding the property of your dreams and even saving thousands of dollars.
When searching for an agent, be sure to specify that you are looking for an agent that specializes in investment properties. If you are a first-time homebuyer, you’ll also want to opt for an agent that has plentiful experience in working with new buyers.
An agent that understands how investment properties work is crucial to your success. They need to be experts in locating homes that are going to get the most bang for your buck and produce a quality return.
4. Understand All of the Costs
When it comes to owning a home, it’s not just about paying the monthly mortgage.
Be realistic in what your house-related payments are each month and factor these into your budget. Be sure to account for these costs:
- Monthly mortgage
- Property taxes
- HOA fees
These costs must all be considered in order to guarantee that you can afford to carry your home.
To illustrate this point, let’s consider that the average American homeowner pays an additional $9000 each year covering unexpected costs. You can also factor in roughly 1% of the cost of the home to cover typical maintenance each year.
5. Evaluate What Type of Landlord You Want to Be
With buying a rental property comes the responsibility to be a landlord.
If the plumbing needs to be fixed, it’s your responsibility. If one tenant fails to pay their rent, you’re the one that’s going after them. And, what if the fridge stops working in the middle of the night? You guessed it, it’s your responsibility.
While you can decide to manage these responsibilities on your own, you can also decide to work with a third party company that handles these duties for you.
Before you move forward in your search, be sure that you understand the duties that come along with being a landlord.
If you want to minimize these responsibilities, you may want to consider a turnkey property investment. With this type of service, a third party takes care of all your typical landlord responsibilities.
This can include anything from finding suitable tenants to collecting the monthly rent. While this is a paid service, it’s a great option for investors who want to minimize their workload. Read more here!
6. Look for a Home With Minor Repairs
Unless you are a skilled contractor, you’re going to want your first investment property to be relatively low maintenance.
While it may be tempting to purchase an inexpensive fixer-upper, this is just going to cost you more time and money in the long-run. This is both initially in upfront costs as well as throughout the term of the tenancy as things continue to fall apart and break.
This can also prove to create poor relationships with tenants if their living facilities are not always in good and working order.
Instead, focus on homes that are still priced below market value but don’t require extensive renovation. The home does not have to be in pristine condition, but you want to minimize the initial costs of the renovation as much as possible.
7. Calculate Operating Expenses
When evaluating the cost of your investment, you’re going to want to take into consideration the operating expenses of the property. Overall, the operating expenses of your investment property will be between 35 percent and 85 percent of your gross operating income.
To illustrate this point, let’s use an example: Let’s say the monthly rent that you charge is $1500 and your monthly expenses are $600. This means your operating expenses are at 40%.
Be sure that you are comfortable in these costs and that you can afford to operate the property on a monthly basis.
8. Determine Your Return
Every property investor dreams of yielding a high return on their investment. But, in order to do this, it’s crucial to understand how these calculations work in the first place.
To calculate the return on your investment property, you need to make the following calculations:
Begin by taking the ‘annual rental income’ and subtract your ‘annual operating expenses’ from this. Next, divide this number by the ‘property value’ and multiply this number by 100.
In general, a 6 percent return on your investment is healthy in your first year as a landlord. As the years go on, you can expect for this number to continue to increase.
9. Choose the Right Neighborhood
When it comes to choosing the right neighborhood for your investment property, you’re going to want to consider a number of factors. Among those factors, be sure to place the highest importance on:
- Locations with affordable property taxes
- Neighborhoods that are up and coming -your realtor will be able to help you with this
- Neighborhoods with good amenities
- Neighborhoods in close proximity to school zones
Remember that the type of neighborhood in which you buy is going to influence the type of tenant(s) which you attract. For example, a student neighborhood close to a college may attract more rowdy and unkept tenants.
The neighborhood can also help to determine which type of house that you desire. In general, neighborhoods that are comprised of townhouses tend to attract the best tenants. This is because it’s often young couples with one or two babies whom care for their home and tend to live quieter lives.
10. Be Realistic in Your Expectations
Lastly, you’re going to want to remind yourself to be realistic with your profits.
Consider that an investment property may not turn out extremely profitable cheques each month. For more competitive markets, don’t be surprised if you merely break even
.Remember, the real-time to shine is when you sell the home down the road for a much higher than you initially purchased it for. This is where you are going to witness your real profit.
If this is your first investment property, be prepared to make mistakes and learn along the way. After all, becoming a skilled and profitable investor takes plenty of time and experience.
How to Tackle Your First Rental Property
If you’re thinking about buying your first rental property then kudos to you!
Investing your money in real estate has the ability to lead to a profitable and long-term investment.
Before plunging into the world of investment properties, you’re going to want to educate yourself by arming yourself with all of the facts. After all, purchasing a home is often one of the largest investments people make in their lives.
From understanding your responsibilities as a landlord and arranging your mortgage loan to understanding operating expenses and finding the right home, it’s not always that straightforward.
When it comes to investing, be sure to have all of your facts straight, your calculations correct and your financing in order.
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