Buying your first rental property is no easy feat, so you’ll want as many tips as you can get!
Here are just 27 of the top tips for buying your first rental property to whet your appetite. After you’re done with these, you’re going to want to keep reading until you’re able to make a list of top tips yourself!
But, realize, that there are something you’ll learn about buying your first rental property that you’ll only learn by buying your first rental property.
1. Ensure Being a Landlord is for You
How handy are you? You can hire someone to do all your repairs and maintenance, from big tasks to little ones, but it’s going to take a bite out of your income. Investors who own multiple properties often make their own repairs.
At the same time, you need to be able to delegate tasks and know when it’s not worth your time or resources to do something yourself.
2. Pay Down Debt First
A seasoned investor knows how to manage their debt, but if you’re just starting out you should try to be as close to debt-free as possible. Student loans, medical debt, or helping your kids with their own college tuition may all be reasons to hold off on investing. In fact, the decision may be made for you because if your debt to income ratio is too high, you won’t be able to get a loan.
To figure out your debt to income ratio simply add up all your monthly debt payments and divide the sum by your gross monthly income. If your ratio is 43% or higher than you’re out of luck because of 43%. 43% is the higher ratio a lender will allow in order to issue a qualified mortgage.
3. Separate Personal and Business Finances
If you invest your personal money into your business ventures then you open yourself up to being potentially personally liable for your business’s financial actions. Combining personal and business finances can also lead to tax complications.
One of the easiest ways to keep your personal and business finances separate while also limiting your personal liability is to open a small business checking account.
4. Get Advice From Other Landlords
Finding good tenants and keeping good tenants are indispensable skills. You’ll want to join a local landlord association or talking to experienced landlords just to get some wisdom. This will help you avoid making mistakes, so you will hiring a property management company that will handle tenant relations for you.
5. Be Aware of Short-Term Rental Restrictions
In the wake of the popularity of short-term rental companies such as Airbnb, many places have passed short-term rental restrictions. Your condo association or homeowner’s association (HOA) may also have their own set of restrictions, like not allowing rentals under 30 days. So, find out what, if anything, those restrictions are, and keep that in your mind when considering where to buy your rental property.
6. Get the Down Payment
If you’re going to be buying an investment property then you’re going to need a larger down payment than the one you’d need for a comparable primary residency. 3% is not going to cut it!
Think 20% or more because mortgage insurance is not available on rental properties.
7. Line Up Your Financing Early
Figure out which mortgage works best for you. The terms, the rate, etc are all important factors for first-time investors. You can use online tools where you input information and then multiple lenders make offers that suit your needs.
8. Beware of High-Interest Rates
The interest rate on an investment property will be .5 to .75% greater than a primary residence. That’s because the lender is taking on greater risk with an investment property. After all, you’re more likely to default on a rental property than on your own home!
9. Calculate Your Margins
You should set a goal of making a return of 10%. And estimate that maintenance costs at least 1% of the property value annually (so a property that’s $300,000 will require $3,000). Other expenses include taxes, monthly expenses like pest control and landscaping, potential homeowner’s association fees, etc.
10. Invest in Single-Family Homes
The easiest way to get started is with a single-family home. It requires less maintenance than multi-family homes or commercial properties. And with only a single tenant, there’s less wear and tear to deal with. Repairs are easier as well because you’re only dealing with one household’s worth of repairs
11. Avoid a Fixer-Upper
The idea of buying, repairing, and then quickly selling a property may sound appealing, but unless you know what you’re doing then “flipping” is likely not for you. House flippers have contractors lined up who do quality work at affordable prices, or they do the improvements themselves.
The ideal purchase for longer-term investing is a home that’s below the market price and needs only minor repairs. Plus, if you’re flipping a house you don’t get to make use of depreciation, which is the tax deduction you make based on how much your rental property costs and the cost of improvements (that’s because depreciation cannot be applied to properties sold in the same twelve-month period in which they are purchased).
12. Calculate Operating Expenses
Operating expenses on your property will range between 35% and 80% of your gross operating income. A good rough estimate is the 50% rule. If your rent is $2,000 per month expect to pay $1,000 in expenses.
13. Determine Your Return
What’s your return on every dollar you invest? For stocks, it’s 7.5%, for bonds it’s 4.5%, and for a first-year landlord 6% is a good place to start (and expect that figure to grow!). Plus, your property will hopefully appreciate in value (and equity is valuable in and of itself as well).
14. Get a Low-Cost Home
Experts recommend starting at a home that’s $150,000. Why? Because the pricier the home the more you can expect to spend on expenses over time. Although, your expenses should remain stable in so far a home that’s more or less expensive than it would normally be doesn’t mean your expenses will go up or down with the value of your property once it’s purchased.
15. Invest Enough to Be Cash Flow Positive
Use enough money on your down payment to remain cash flow positive with your investment. Your investment isn’t much of an investment if it’s not making you money! And that especially hurts if it’s because you didn’t come to the table with enough financial stability.
And how long can you keep it up when you’re losing money? There will always be unexpected expenses, and maybe even tough economic times. If you’re hemorrhaging cash due to your investment those hard times are gonna be harder to survive! But if you’re constantly making money and have a mortgage you can manage, then you’re more likely to hold on to the property long enough to really reap the rewards!
16. Purchase Property with Outdoor Space
An outdoor area is quite attractive to prospective renters. Especially if it’s not something they expect! They can have company over or have a place to keep to themselves. In many cases, what matters most is that the area is private, usable and that it’s permitted to make the space one’s own using plants, furniture, lighting, ornaments, etc. These qualities can be more important than the type of space it is, so even a paved area without grass can be appealing so long as it’s a space they can call their own (even if it’s shared with other tenants).
17. Perform Property Inspections
There are things to inspect about your property that you may not even know if you’re not a professional property inspector. And work with someone local, too, because there are peculiarities based on geography.
Would you even think to check for radon gas if someone didn’t mention to you that there are parts of the country where radon comes up from the foundation?
Or would you know to conduct a sonar scan of the land surrounding an older house if someone didn’t tell you that there may be an unknown oil tank buried there?
These are things a local professional inspector would know!
18. Get an Appraisal
You’ll want to know how much your property is worth and if it’s worth it to make it your property. Remember, too many repairs may eat into your profit and/or may mean not starting from as strong of a financial position. Additionally, the more your property is worth the more it’ll cost to repair.
19. Find the Right Location
But which one?
Look for low property taxes, as good a school district as possible, low crime rates, a growing job market, and amenities such as green spaces, malls, restaurants, movie theaters, and potential local attractions.
20. Ensure there is Adequate Parking
Research what the parking situation is. In some towns, there are different requirements for rental vs residential parking. In some places, there are designated areas, in others a flat, per-property parking space requirement, or you may encounter a system where parking is based on the square footage of your property!
You need to know what’s going on in the town because you may be forced to get parking on your property, which is a real problem if you don’t have space for parking! Additionally, off-street parking is really important given the prevalence of car culture. In some places, you can’t even get around without a car, so a place to park is indispensable.
21. Talk to the Neighbors
Talk to your potential neighbors. Let them know you’re thinking about buying a house and ask them if they’ve ever had any difficulty with the owner or the tenant. Also, drive around the neighborhood at various times of the day and during different days of the week to get a feel for what the area is like.
22. Evaluate Risk vs. Reward
A list of risks and rewards is a popular decision-making technique. Although, both sections of this list are also great guides to investing wisely.
- Your income is passive. Not including your initial investment and the cost of operation, you can make money while not sacrificing much time or resources. Especially if you hire a property manager!
- Your income will grow as your real estate appreciates in value.
- Real estate can go into a self-directed IRA.
- income generated through rental properties is not subject to Social Security tax.
- The interest on an investment property loan is tax-deductible.
- Real estate is more stable than the stock market, barring another housing crisis.
- Real estate, unlike stocks, is a physical asset you can feel.
- You can get a tax deduction on the cost of your property and the cost of improvements (but not maintenance). This is known as depreciation!
- Tenants can be hard to deal with, which is another reason to use a property manager.
- If your gross adjusted income is $200,000 for an individual or $250,000 for a married couple filing jointly, then you may be subjected to a 3.8% surtax on net investment income.
- Rental income may not cover your mortgage entirely.
- You can’t sell real estate as easily as other investments. And, unlike stocks, you can’t sell a portion of your investment. It’s either the whole shebang or none of it.
- The downpayment and the cost/effort of selling the property are high.
- If you don’t have a tenant, you eat that loss. Periods of not having a tenant, however, are often factored into your budget when calculating operating costs. Finding a tenant is also something your property manager can do!
23. Know Your Marketing Strategy
Sure, when you’re making your operation budget you’ll factor in some vacancies into it. But that doesn’t mean you shouldn’t try to not have vacancies! Before you invest, figure out how you’re going to get new tenants and retain them as well! So, have a marketing strategy in place. Major online real estate marketplaces are the best place to begin.
24. Have a Written Lease in Place
One of the best ways to retain a tenant is to have an explicitly written lease. This way they’re less likely to sign up for something they wouldn’t want to sign up for. Stipulate when the payments are due, what the lease termination fees are, if pets are allowed, what sort of cleaning the tenant is expected to do, if the heat should be a certain temperature, etc. If they can’t meet all the demands then hopefully they’ll show themselves the door!
25. Screen Prospective Tenants Thoroughly
An explicit lease agreement should be just one of your tools for screening your tenants. Be as thorough as possible by verifying previous addressed, conducting criminal background checks, getting an eviction history, speaking with references, etc. Their subscription services you can use that will take care of all this for you! A property manager can take care of this as well.
26. Accept Rent Payments Online
Online rent payment is the easiest route to take. No more lost checks, less opportunity for delays, and it’s an easy way for everyone to keep track of everything. Win-win!
27. Consider Working with a Property Management Company
Time, effort, emotional labor; it costs a lot to be a landlord. Consider a property management company to make things easier for you! They’ll pick up those 2 AM phone calls so you don’t have to. Make sure to shop around to make sure you get the best deal for the best company. They’ll take care of finding and dealing with tenants too!
Now that you know the top 27 tips to buy your first rental property you’re going to want to keep reading so that you get all the way to the most “meh” tips to buying a rental property. That’s because when you’re committing to something as big as buying your first rental property there’s no shortage of tips to read!