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Are you interested in real estate investing? If so, you’ve come to the right place. Deciding to become a landlord or property investor for the first time is a big step. It can be a little daunting, but with the right information and advice, you can feel confident in your decision.
In this guide, we will walk you through everything you need to know in how to buy your first rental property. We will cover topics such as:
- The basics of property rentals
- How to find the right property
- The importance of due diligence
- Financing your investment
- Managing your property
- Taxes and legal considerations
By the end of this guide, you will have all the information you need to get started investing in property rentals. Let’s get started!
Table of Contents
Do Your Research
The very first thing a new investor needs to do when considering investing in property rentals is to do your research. This includes studying the market, learning about the different types of investment properties available, and finding out what areas offer the best return on investment (ROI).
When you have some locations in mind, research the specific neighborhoods in depth. Learn about the schools, crime rates, and other important factors that can influence your decision.
Finances
It’s also important to take into account your own personal financial situation. How much can you afford to invest? What are your long-term goals for this investment? Knowing the answers to these questions will help you narrow down your search and focus on properties that fit both your budget and investment goals.
When looking at the financial responsibility of property investment, it’s important to consider the following:
Upfront costs
Buying a property, regardless of whether it’s for investment or personal use, always comes with upfront costs. These can include the purchase price of the property, legal fees, stamp duty, and renovation costs (if needed). When getting a mortgage loan, you will also have to pay closing costs at the end.
It’s important to have a realistic idea of how much you’ll need to spend upfront in order to buy the property.
Ongoing costs
There are also ongoing costs associated with rental property owners such as mortgage payments, insurance, and property taxes. Make sure you are aware of these costs and have budgeted for them in your overall investment plan.
Any type of house requires maintenance. Something is always breaking like a dishwasher or toilet and needs to be replaced.
Returns
When it comes to property investment, it’s important to remember that your returns may not be immediate. It can take time for a property to appreciate in value and for rental income to start coming in. Have patience and be prepared for some ups and downs along the way.
Credit Score
A good credit score will make it easier to qualify for a mortgage and will also get you a lower interest rate. If your credit score is not as good as you’d like, there are things you can do to improve it.
Start by checking your credit report for any errors and paying off any outstanding debts. Ideally, try to get your credit score as close to 700 as possible before you start looking for investment property.
The credit score required for a fixed-rate mortgage on a single-unit investment property is 620. You will also need to make a 20% down payment. However, if your credit score is 720 or above, you are only required to put down 15% on a single-unit investment property. The difference in down payment requirements can save you tens of thousands of dollars in upfront costs.
Location, Location, Location
One of the most important factors to consider when buying an investment property is location. The ideal location will have a good mix of amenities and schools, be close to public transportation, and have a stable and growing economy.
The location you decide to invest in can impact if there are enough potential tenants to rent it out. The real estate market can be vastly different from city to city.
The amount of potential tenants and the average income of the area have a direct effect on your potential cash flow. You also have to consider if you are more likely to rent long-term to locals or short-term vacation rentals.
Cash flow
It’s important to have a positive cash flow from your rental property. This means that the rent you receive each month is more than the costs of owning and maintaining the property. If your cash flow is negative, it may not be wise to invest in property rentals at this time.
You should also have a solid understanding of what your cash flow will be in the future. This includes forecasting for potential rent hikes, maintenance costs, and other expenses that may come up.
The Right Property
Once you have done your research and know what you can afford, it’s time to start looking for the right property.
When searching for a property, keep in mind the following:
- The property should be in a good location with a stable and growing economy
- It should have a mix of amenities and schools nearby
- There should be a healthy demand for rentals in the area
- The property should meet your budget and investment goals
Size Matters
Another thing to consider when searching for a property is its size. You want to find something that is the right fit for your needs.
If you are planning on renting out a property to long-term tenants, you may want to consider something with multiple bedrooms or multifamily home.
However, if you are looking for a property to use as a vacation rental, a smaller unit may be a better option.
The Process To Buy Your First Rental Property
Now that you have a general idea of what to expect as a real estate investor, let’s take a look at the process involved in making this type of purchase.
Finding the Property
The best way to find investment property is to use a real estate agent. They have years of experience and know the market inside out. They can help you narrow down your search and find properties that fit both your budget and investment goals.
Another option is to search for properties online. There are many websites that offer listings of investment properties, including Roofstock and Rocket HQ.
Making an Offer
Once you have found a property that you are interested in, it is time to make an offer. This is where your real estate agent can be very helpful. They will help you negotiate the best price for the property and ensure that all of your terms and conditions are met.
Getting a Mortgage
Unless you are paying in cash, home buying involves the need to get a mortgage. This process can be time-consuming, but your real estate agent can help you through it.
The most important thing to remember is that mortgage lenders look at your credit score. The credit score required for a fixed-rate mortgage on a single-unit investment property is 620. You will also need to make a down payment of at least 20%.
Closing the Deal
Once you have agreed to the terms of the sale, it is time for the closing. This is where you will sign all of the paperwork and pay for the property.
You will also need to set up an escrow account. This is an account that holds your money until all of the repairs and renovations on the property are completed.
List Your Investment Property
When it is time to make money on your investment, you must advertise your property to renters.
Are You Ready To Be a Landlord?
It takes a great deal of work to find the right property for real estate investment. Once you become a homeowner of a 2nd (or more) property, you have to deal with the benefits and hassles of being a landlord. Before making that step, there are some things to consider.
Taxes
As a landlord, you will be subject to different taxes than if you were just an investor. These include:
- Federal income tax on your rental income
- Self-employment tax on your rental income
- State and local income tax on your rental income
- Property tax on the value of your property
In addition, you may also be subject to the Net Investment Income Tax, which is a 3.8% tax on your net rental income.
Insurance
You will also need to look at the different types of insurance policies you will need on your property. You should have both homeowners insurance and landlord’s insurance.
Repairs and Maintenance
As a landlord, you are responsible for repairs and maintenance on the property. It may not be a surprise to put a lot of work into a fixer-upper, however, new properties will also need repairs, for example, installing new tiles, changing the interior, etc. Even renovating bathrooms cost quite a lot.
Such repairs can be costly, so it is important to factor this into your budget. The type of property you buy can have an effect on how often you need to do repairs and maintenance.
Evictions
Sometimes, you may deal with tenants who won’t pay their monthly rent. If you have to evict a tenant, it can be a costly and time-consuming process. You will need to hire an attorney and go through the court system. You must also look into the various state laws that apply to evictions.
Property Management
If you don’t have time to manage renters on your own, you may want to hire property management professionals. When you are ready to list your place for rent, you can use several services like AirBnb, Booking.com and more.
Purchasing an investment property can be a daunting task, but if you do your homework and have a good team in place, it can be a very rewarding experience. The right property and renters can help you quickly build home equity. You also get tax benefits by owning 2nd properties.
By following these tips on how to buy your first rental property, you will be on your way to becoming a successful property investor.
Featured Image Credit: microstock3D
