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Buying a rental property can be an overwhelming and exciting experience. If done correctly, it can draw incredible capital gains and regular cash flow for the owner. But, like any real estate investment, a rental property can become a financial liability if not properly managed. Therefore, consider investing some time toward learning about how to buy a rental property before you acquire one.
Having a real estate investment diversifies your portfolio, and it can allow you the opportunity to explore multiple avenues for further diversification, such as:
REITs give you the opportunity to invest in real estate without having physical land. With REITs, you buy shares in companies that own large real estate portfolios, like commercial buildings or apartment complexes. They, in turn, pay high dividends which makes the investment worth every penny.
Nothing beats owning multiple residential properties. It not only helps you generate monthly income, but it also helps you maintain your investment. The value of real estate almost always increases over time.
You may even consider renting out a room or portion of your current residence as an additional investment opportunity. Multiple real estate websites can help you locate prospective short term renters. All you need to do is register with those websites to start generating possible rental leads.
For a real estate investor, buying a first rental property is a big step. It’s one of the largest investments you’ll make during your lifetime. With a little effort and time, your rental property can become a great source of passive income.
You should start with the basics when buying a rental property, and that is knowing how to get a home loan, the best way to locate a good rental property, and strategies for finding quality tenants.
Here Are Some Additional Tips for Buying a Rental Property:
Being a landlord comes with a unique set of responsibilities, and not everyone is good at it. Have you ever repaired drywall or unclogged a toilet? Are you familiar with the tools usually found in a toolbox? You might be thinking of outsourcing these elements to specialists, but doing so will eat into your profits. Owners who don’t have extensive rental portfolios often do their repairs to save money. Of course, you can do the same, especially if you have multiple rental properties to manage, but that’s typically not recommended for new property owners.
Put yourself in the landlord’s shoes and evaluate whether you are really the handy type or if you’re just looking for a way to save money. Simply buying a rental property does not make you a successful landlord.
A savvy real estate investor may assume some debt as part of building their property portfolio and investment strategy. But for someone new to investing, carrying significant personal debt is not recommended. If you have loans like unpaid medical bills or student loans, investing in real estate while foregoing your debt obligations is not the right move.
Don’t put yourself in a position where you don’t have the necessary cash to make bill payments even though your rental property can potentially boost your cash flow.
Generally, owning rental property requires a larger down payment than a traditional owner-occupied property. The down payment is usually equal to the one you paid when you bought your primary residence might not work here. You should be thinking of making a down payment of at least 20% of the asking price.
Buying a rental property is primarily about location. The last thing a property owner may think of is buying rental property in an area in which the market values are declining. Instead, choose a place where the population is growing.
In addition, when real estate investing, look for locations that have good school districts, low property taxes, and plenty of nearby amenities like restaurants, malls, movie theatres, and parks.
Asking how to invest in real estate may also mean choosing between paying for a property with cash or with a loan. It depends on your investing goals. Buying with cash can generate positive monthly cash flow. You would also earn more net profit when buying with cash, but you would see a larger annual return if you financed the purchase through a home loan. The choice is yours.
Once you select a home you want to buy, talk to the neighbors. Let them know your intentions to buy the property and ask if they have had any bad experiences due to location. Get the feel of the surroundings by visiting it at different times of the day and different days of the week.
Borrowing money might be relatively cheap, but the interest rates on an investment property are generally higher. So, if you are buying a rental property with a home loan, you’ll want to secure a low mortgage payment that doesn’t consume too much of your profits.
Note: Discrimination in mortgage lending is illegal. If you feel like you are being discriminated against based on sex, religion, race, marital status, disability, national origin, or age, you may report it to the U.S. Department of Housing and Urban Development (HUD).
Homeowner’s insurance does not protect your interests as a landlord. To protect your real estate investment, consider purchasing landlord insurance. Landlord insurance includes liability protection, lost rental income, and property damage.
Tip: Before you choose an insurance company, get the rates and plans from multiple companies and compare them to see which is the best option for you. Also, to lower your costs, explore the option of coupling your homeowner insurance with landlord insurance.
It’s not always the maintenance and repair cost that will eat into your rental income; be mindful of unexpected expenses. There is always the potential for an emergency to pop up, like a burst pipe that destroys a kitchen floor or roof damage from a wind storm. Allocate at least 10% – 25% of your rental income for unexpected costs so you can survive emergency situations.
Operating costs for your rental unit can be anywhere between 30% and 50% of your gross rental income. For example, if you charge $2,000 monthly rent and spend $800, you’re spending 40% of your income on operating expenses. For better management, make a 50% rule. In other words, if you are charging $2,000 for monthly rent, expect to pay $1,000 in operating costs.
Owning a rental property may also mean you have to become familiar with the local landlord tenant laws. You should clearly understand your obligations and your tenants’ rights, which include things like lease requirements, security deposits, fair housing, and eviction rules.
Look for returns of 7% – 10% because you have to factor in expenses like property taxes, homeowners association fees, homeowners’ insurance, and monthly expenses like pest control.
You might be tempted to buy a cheap house and then flip it to maximize your earning potential. However, if you are buying your first property, this might not be the best idea. House flipping requires insight into renovation work and skills in making large home improvements. As a novice rental property owner, you may end up investing a lot more money in the renovation project than the property is worth.
Here’s a simple rule: operating expenses are directly proportional to the cost of the property. So, if you purchase an expensive house, it could be a source of great ongoing expenses. Therefore, experts suggest that, for the first house, investors should start from a low-cost house and gradually increase their investment to more expensive properties as they gain experience.
Tenants are always attracted to houses with outdoor areas. What makes it even better is that the area is usable and private. Tenants like the idea if they are allowed to make it their own by planting trees, placing furniture, and installing ornaments. So, if you can give this permission to potential tenants along with outdoor space, you are likely to get several rental applications from prospective tenants.
When you search for how to buy a rental property, there’s no shortage of tips available. Now that you know the top 15 tips on how to invest in real estate, you should be in a better position to maximize your earning potential as a rental property owner.
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