Over the past decades, several different types of real estate investment strategies have been utilized to increase cash flow, create highly diversified portfolios, and achieve higher levels of wealth. If you have an interest in buying rental property, you are about to embark on a journey that several others have taken before you. This road will direct you towards achieving your investment goals, meeting financial objectives that you have set out for yourself, and will help in accumulating savings towards your retirement. Before reaping the rewards associated with this endeavor, you need to learn a little about buying your first rental property.
How Much Should be Spent on My First Rental Property?
When purchasing your first rental property, you must use a standard calculation of ensuring that you may charge at least 1% of the total amount you purchase it for when renting it.
For example, if you purchase a home for $75,000, you should be able to charge at least $750 each month for rent.
You should also only purchase when the price is anywhere from 10% to 20% below the average market price. It is also imperative that you know that you will be able to achieve – at least – a return on investment of 15%.
Let’s say that you put $15,000 down on a rental property, you should create a cash flow in the first year of a minimum of $2,250. While this is actually a bit on the low side, it helps to secure your initial investment.
What Should a Profit Be on a Rental Property That I Buy?
A profit on a rental property should be enough to cover all of the expenses. Examples include the taxes that you have to pay, the price of your insurance on the property, and any associated debt directly related to the property. Always subtract the expenses from the amount that you make and any leftover funds is your profit.
Generally speaking, any profit that is a minimum of $100 is considered to be ideal; however, as with any financial endeavor, the more that you make, the better!
You should determine the total amount that you need to cover expenses and the amount that you want to make in order to ensure that you are meeting the financial goals that you have associated with your investment.
Is Purchasing a Rental Property Considered to be a Good Investment?
Yes, buying rental property is considered to be a good investment. You may borrow the money from a financial institution or someone else to help increase the return that you will experience. Many refer to this as “leverage”. This results in significant less amounts of cash being needed than you may need to purchase other types of investments, such as stocks. It is less risky, too! In addition to this, the following outlines other reasons why rental properties are considered to be an ideal investment:
- As an investor in rental property, you are actually directly responsible for the overall outcome of the overall initial investment.
- While it is true that real estate markets do fluctuate to some degree or another, people are always in need of a place to reside. Due to the pandemic, high mortgage rates, and people having a natural desire to be more mobile, the overall demand associated with rental properties is increasing and at a very fast rate.
- The rental business has been around for a very long time. Millions of various investors have succeeded before you. In the year 2015 – alone – 10.6 million different taxpayers claimed income from rentals for a total of 17.7 million different properties. In short, you can almost guarantee that you will experience a high level of success with rental property.
- In most instances, rental properties are considered to be generally stable and highly predictable.
- As a rental property investor, you have a lot of variety in the type of property that you purchase. You may choose from single-family homes, multi-family properties, apartments, condos, Section 8, and more! This gives you plenty of room to diversify your portfolio and multiple methods for generating additional streams of income.
- Rental property investing is considered to be easy to understand and extremely straightforward.
- Rental properties include four main profit sources. These include the actual cash flow, its overall appreciation, paying down on any loans associated with it, and numerous tax benefits. As an investor, you have the capability of cashing in on all of these sources.
- Finally, you do not have to be physically present at your rental property in order to make money for it!
What are the Risks of Owning Rental Property?
If you purchase rental property, the goal is to make money. Risks are those factors that could result in the loss of money. The main risks associated with owning rental property are as follows:
- Vacancy – If your rental property becomes vacant, you no longer collect rent on it until it is occupied again. This may be complicated by the fact that once a tenant moves out, they could leave behind damages that need to be repaired. If you aren’t bringing in any money, this makes getting the rental ready for the next occupants to be quite challenging. If you depend on the rent money from the property to pay a mortgage or other type of loan, you will need to figure out an alternative for coming up with those funds should your tenant move out.
- Repairs and Maintenance – It is a given. Eventually, you will have to spend money on repairs and maintenance with your rental property. It could be as simple as pressure washing outside or as challenging as replacing a septic tank. Minor repairs and maintenance are typically inexpensive; however, there are some repairs that could result in a bill that is thousands of dollars. The trick is, stay ahead and your maintenance and you won’t have as many repairs.
- Market Decreases – There may come a time when the rental market changes and you have to decrease the amount of money that you collect in rent. This means that your income level from the rent may not meet the overall expenses associated with the property. A work around from avoiding this negatively impacting you too much is to always charge enough rent so that the funds or profits actually surpass the expenses that you have that are associated with that profit.
- Property Value Decreases – In rental property, the value of the property – as a whole -typically does not impact your business unless you are choosing to sell or refinance that property. In these instances, the decrease in the property value will also result in a decrease to your profits.
What are the Steps for Buying That First Rental Property?
There are several steps that should be taken when purchasing rental property. The following outlines these steps with a brief explanation of each:
- First, you must consider why you are purchasing the rental property. Will it be your main source of income? It is to generate a retirement fund? Is it simply to start a side business? By knowing the WHY behind choosing to go into the rental business, you will have a better idea of what to purchase and which investment strategy to use to make that investment.
- Next, you should consult with others that are already in the business. You should inquire about their experiences, the strategies that they use when investing, and any issues that they experience in the business.
- Once you are serious about the investment, it is time to save money for a down payment. First, pay off any outstanding debt that you have. Reduce any expenses that are unnecessary. You may even have to obtain a second job. Ideally, it is best to save a down payment that is anywhere from 20% to 30% of the total price of the rental property that you want to purchase. Most mortgage companies require a higher down payment on income producing properties than properties that will be homesteaded.
- Get money and save it in an emergency fund for the property. There will come a time when you have unforeseen circumstances occur and will need to spend a little money. You will have to perform regular maintenance -which usually costs a little. You will have to pay the property taxes on the property. If something breaks down, you will be responsible for fixing it.
- Even the best of all real estate markets will experience some type of dip. If this happens, you will want to be ready. One of the best things you can do is to set up an account and put in money that will cover at least 6 months of your total expenses.
- Research various types of rental markets. You will need to review the area where the property is located. You will want to carefully analyze the population, the job market of the region, if any revitalization efforts are happening, and similar factors.
- Before making a rental property purchase, it is important that you obtain a home inspection of said property. These inspections outline any type of red flags with the property that could be costly down the road. The inspection will also provide you with a little leverage when negotiating the price of the home prior to purchase.
- You should have an appraisal done on the home so that you know exactly what the home is worth and you are not overpaying.
- Unless you are an avid DIYer or have a lot of experience, you should avoid purchasing a fixer-upper when buying rental property. Being that it will be the first rental property you buy; you certainly do not want to go in debt to it before you even get started. Now, if you are experienced and have all of the tools and resources to do the work, that is a different story! You may even want to focus on fixer uppers in this case because you will be able to buy them for real cheap.
- Finally, you can make an offer on the rental property. The closing time will vary, but it is important to do it as quickly as possible so that you are able to make money from your property quickly.
How Do I Pre-Qualify for a Loan to Buy Rental Property?
There are several factors for pre-qualifications on a rental property loan. Below are the most common:
- First, you should have a credit score of at least 680; however, higher is better. Nearly every lender will accept those 740 and up.
- You will need to show that you have worked for the past two years. If you are self-employed, you may need to verify that you sustained yourself financially for three to five years.
- You must have the down payment for the property.
- You must be able to verify that your debt-to-income ratio is very low.
- You should be able to verify that you have the means to pay the payment each month – apart from the rental property.
How Can I Make Buying My First Rental Easy?
If you want to make buying your first rental property easy, you should hire a property management company to assist you. These companies have comprehensive information on the rental property market and may have direct access to homes that are currently for sale.
They have the ability to help you purchase the right type of property and will manage all aspects of the property for you. Once you are ready to rent, they will run all of the screenings, handle the maintenance of the property, and even collect the rent monies for you. If you go at it without a property management company, you are surely to find that it is quite overwhelming; however, if you have a property manager, you will reap numerous rewards. For more information, contact us today at: 720-839-7482