Owning a rental property is one of the best ways to begin accumulating long-term wealth. A solid rental property can not only provide you with monthly cash flow, but can serve as the backbone of your retirement plan. The key, however, is finding the right property. Not every quality property you look at will make a good rental property. It takes the right mix of demand and location to maximize your return. If you have been interested in owning a rental, but weren’t sure what steps to take, here are a few tips on how to buy your first property:
1. Plan: Buying any property and calling it a rental is not a recipe for success. Before you get too far, you need to make a plan for what you want to do and how you plan on doing it. Are you looking for a single or multifamily property? What type of area are you looking to be in? Do you have a specific price range in mind? Are you going to manage it yourself, or seek the help of a property manager? These are just a few of the questions you should answer. You should have a good idea of your goals and how you plan on achieving them before you do anything else. As rewarding as a rental property can be, they can also engulf your business if you get involved in a bad property. Once you know the area and type of property you are looking for, you can begin to get involved with the numbers.
2. Finances: Most people that have never owned a rental property before think that all you need to do is find tenants and start collecting checks. There are two reasons that someone would buy a rental property: long term appreciation and positive monthly cash flow. Both of these start with what type of financing you use. The higher your monthly payment, the less cash flow that is available. Most investment loan programs require anywhere from a 20 to 30 percent down payment. Additionally, the homeowners insurance is typically higher than an average primary residence. There are also other fees which must be accounted for with a rental. If you are using a property manager, they will typically charge 8-10 percent of the monthly rent. There is also landscaping and snow removal fees that must be accounted for. Finally, you need to have a reserve fund for the inevitable clogged toilet or broken appliance. You will often need more money than you thought, and the cash flow may not be as high as you anticipate. Before you get any further, talk to your lender or mortgage broker to find out all of your financing options and the anticipated monthly payment. Also, reach out to a fellow investor to get a better idea on the monthly or annual costs for the property that you may be missing.
3. Real Estate Agent: There is a huge difference in making an offer for a primary residence than there is for a rental property. Like any purchase, you want to always get the best deal possible. On a rental property, every dollar spent is a decrease in monthly cash flow. Using a good real estate agent will help you get the best deal. With a plan and financing in place, it will be easier for your agent to get you a property that you really want. The most important thing at this stage is to remain patient. It is better to wait a few extra weeks or months to get a better property.
4. Acceptance: From the moment that your offer is accepted, you are on the clock. Depending on how long you have to close, you may be forced to act quickly. You should have an idea of what work, if any, you want to do to the property. From there, you should start making calls for who you want to do it and if they are available. If you are using a property manager, you should start interviewing them and seeing if they are a good fit. It is also not too early to start looking for new tenants. Of course you have to wait until you take ownership to show the house, but you can place an ad online with the address and description to gauge interest. It is very important that you take your time to find the best possible tenants. Many new landlords will rent to the first person that applies. Good tenants are the backbone of any rental property. It is important that you do your due diligence on every applicant to make sure they are a good fit. Once you close and have someone in the property, the fun can begin.