Rental properties are one of the best ways to generate long-term wealth. In fact, some of the most successful real estate investors have made their profits though long-term rental properties. Having said that, there is a large population of investors that is intimidated by the process. While far from easy, it is not something that should be intimidating. If you treat it like you would with a rehab property, you will get the results you are looking for. Regardless if you are looking for your first buy-and-hold property or have an established portfolio, here are the five most important steps you can’t ignore during your next rental property acquisition:
1. Acquisition: Even though you plan on keeping the property for a while, the purchase price is still an important factor. There is some argument as to whether you make your money when you buy or when you sell, but the purchase itself is important no matter what. It will directly impact your monthly cash flow, equity position and bottom line. Some investors tend to let up a little when acquiring rental properties over a rehab deal. Your mindset should be the same with every property you buy. You need to do everything you can to get the lowest possible purchase price. With a rental property in the right location, however, it may make sense to spend more on a better property. A good property that retains its value will be a major asset for many years.
2. Financing: How you finance your property has a direct impact on your bottom line. Most investment loan programs require at least 20 percent of the purchase price for a down payment. The more you put down, the lower your mortgage payment will be. The longer you finance the loan, the lower the monthly payment. This works both ways. You will increase your cash flow with a 30 year loan, but you will accelerate how quickly you own the property in a 15 or 20 year program. There are also financing options for fixed or adjustable rate programs as well. If your credit is strong and you have money to put down, you will have more options available to you. Take a look at the annual property tax and insurance amounts to figure out what your new payment will be. The interest rate you qualify for and your loan amount are the two biggest factors in deciding your new monthly payment. Your monthly payment dictates what you need to charge for rent to make a profit.
3. Property Updates: One of the biggest mistakes that buy-and-hold investors make is thinking that they don’t need to update the property. Even though rental demand is high in many areas, you still need to deliver a strong product to maximize your returns. You can make all your upgrades after acquisition or decide to do some as you go. Whatever you decide, you need to have your rental looking good before you market it. Renters have plenty of options in most markets, and if your property is not on par with others they will look elsewhere. You can get away with making minor updates instead of replacing some items, but the property can’t be outdated or sloppy. Regardless of what market you are in, you need to be willing to spend money updating your rental property.
4. Finding Tenants: If this is your first buy-and-hold property, you are naturally excited to fill your vacancy as quickly as possible. You need to exhibit patience and fight the temptation. As a landlord, you are only as good as your tenants. This means going through the screening and application process to find the right ones. If you don’t put the time in, you will end up renting to the wrong tenant, which will sour your opinion of the property. Finding the right tenant for your property makes all the difference.
5. Maintenance and Management: As the property owner, the next item you need to decide is how you are going to manage the property. If cash flow is tight and you are in close proximity to the property, you may decide to handle this yourself. The other alternative is to hire a property management company. This comes at a cost, but it could make your life a whole lot easier. Being a landlord requires much more work than simply collecting rent checks once a month. You need to handle the everyday issues that are bound to happen. You need to have resources at your disposal that you can call when things need to be repaired or replaced. This not only requires reserves, but requires patience on your end. Things happen with every property, regardless of the tenant. A good landlord or property manager gets things fixed without making them a bigger deal then they really are.
Dealing with buy-and-hold properties isn’t easy, but certainly has its rewards. The more properties you are involved in, the easier the process becomes. Buy-and-hold properties may be intimidating at first, but if you follow these five steps you will own your first rental property in no time.