When you invest in rental properties, you have great potential for income. With some research and analysis, and a bit of luck, you can experience a significant return on investment which will provide you with passive income and grow your personal wealth.
To be successful at owning rental property there is certain steps that must be taken. Establishing a solid plan before purchasing a house should be the first step.
Preparation is the key to avoiding severe financial costs of short-sighted rental investments. Before committing to the large purchase of real estate, it’s important to learn the basics and have a plan.
In this article, Upkeep Media explores the top tips for buying your first rental property. If you follow these suggestions, you’ll make the most out of your first real estate investment.
1. Draft an Investment Plan
The first step is to create a plan for your rental investment. Be as thorough as possible. There is no such thing as over planning when it comes to crucial investment decisions.
Here are some questions and areas to consider:
a) What kind of financing option will you pick? Beyond the common FHA, Conventional, and VA home loans there are specialized programs to help individuals with investment properties. Analyze the various ways you can finance the purchase of your first rental property. For many new investors, obtaining a mortgage loan is an indispensable part of the financial plan. So contact a loan originator to get preapproved to find out what financing you qualify for.
b) What type of property will you buy? There are many types of rental properties that you can purchase. They each have their own opportunities, risks, and challenges. You should consider each option and see which one works best for you. Having an experienced REALTOR® can help save you time and money. They will be able to provide direction and narrow down your options in finding a house that best fits your rental investment needs.
Possible rental invest type properties:
- Multi-family homes
- Walk-up apartments
- Single-family residences
c) Do you have the time and means for self-managing? Being a property owner is a demanding job. In order for everything to work, you have to put in a lot of hours and effort. Consider hiring a professional property management company to save you time and reduce your daily stress.
2. Prioritize Familiar Neighborhoods
Consider buying investment properties in areas you personally know well. You’ll have a better feel of the area’s features, challenges, and the general atmosphere. Also, having a social network in that location makes it easier to find tenants.
Use your unique background knowledge to find quality real estate and conduct efficient advertising campaigns.
3. Let your Rental Business Grow Over Time
You don’t have to start with investing in a fancy or expensive rental property. The best options include rental homes that aren’t too costly, are in good condition, and are readily available for the tenants to move into.
As years pass, you can tackle bigger investments. However, when you are just starting out, it pays to pick a property that is easily rentable and doesn’t require additional investments like major repairs.
4. Minimize your Debt
Pay down your debt before purchasing a rental property. While it’s true that big investors add debt to their portfolios, new property investors should first minimize their financial responsibilities. By paying down your car lease and credit cards it will help free up your debt to income ratio. However, make sure you discuss with your mortgage loan originator before taking any action as it can affect your financing.
5. Avoid Fixer-Uppers
Buying a fixer-upper property may lead to investment success, but we don’t recommend it for first-time property investors. The prospects can seem exciting, but the reality could be starkly different from your expectations.
Fixer-uppers could host a number of hidden problems. Some of these issues, such as roofing and foundation, can create expenses that you didn’t sign up for. That’s why you should prioritize properties that are in good condition and require minimal fixes.
6. Devise a Detailed Budget
Your budget should amount to much more than just subtracting mortgage payments from your monthly rental income. There are many expenses linked to owning a rental property. You should account for all these costs when planning your budget.
One of the common approaches is budgeting at least half of your rent for non-mortgage costs.
Common non-mortgage expenses:
- Repairs and maintenance
- Accounting fees
- Legal consultation
- Marketing and advertising
7. Assess Any Associated Risks
Every investment carries risks that must be acknowledged and managed. While each rental property may have unique challenges, it pays to learn about common risk scenarios.
- The rental income doesn’t cover your mortgage payments
- There’s weak liquidity under some economic circumstances
- You’ll have to deal with tenants who take much more of your time than you expected
The bottom line, buying your first rental property is a big project. In order to maximize your chances of growing personal wealth, you should do plenty of research and draft a solid plan.
For your first investments, make sure to reduce your personal debt. Then, choose properties that don’t require much improvement and that aren’t too expensive. Also, make sure to assess the risks and budget for non-mortgage expenses.
Guest article was written by UpKeep Media