Beginner’s Guide to Buying Rental Properties
Wouldn’t it be nice to make additional income every month? Just buy a rental property, find your perfect tenants, and watch the rent checks roll in. Sounds simple, doesn’t it? The reality, however, is not so simple. Becoming a landlord can be both exciting and challenging. No landlord can predict such things as natural disasters, inflation, or difficult tenants who eventually require the eviction process according to state law. However, with the right start, even a new landlord can overcome certain difficulties with minimal financial risks.
So, if you have always wanted to buy real property assets, with these valuable tips and alternative strategies, you can make practical decisions that will help to ensure your rental property’s profitability and set you up for success.
Reasons Why Rental Properties Are Excellent Options
John Stuart Mill, an English philosopher, once said, “Landlords grow rich in their sleep without working…” There are a few reasons why people decide to purchase a rental property, and it is not only about paychecks.
Collecting passive income
Buying a rental property to establish a foundation for passive income is the most popular reason people have for deciding to try this wealth-generating vehicle. However, a landlord can only truly consider the potential income passive if he or she hires a good third-party property manager. Placing management in capable hands makes financial sense and allows the property owner to buy rental property and grow rich while sleeping, generating wealth for generations, just like John Stuart Mill said.
Enjoying financial safety and cash to leverage
Passive income generated from investing in a rental property may become a financial safety cushion in times of need. The option always exists to sell the property if needed when the time is right. As long as the units are rented, the landlord can enjoy flexibility with a consistent cash flow. The more units a person owns, the more secure he or she may feel. Additionally, the cash can be transferred into other endeavors or used as startup capital for a new business, choices that are not so scary when you have a steady income stream.
Opening a tax universe of benefits
Many tax benefits go along with owning a rental property. Therefore, a landlord may pay very little in taxes and sometimes even no taxes on the money from tenants. Any and all repairs made to rental property are tax-deductible? Even the insurance on your property is a deduction. A professional accountant who does a little research can literally save a landlord thousands.
Getting a massive boost to your credit score
A hidden benefit that people often forget about while dealing with financial statements is the potential boost to a person’s credit score. A landlord who remains in good standing with a mortgage company after a real estate transaction can enjoy an increased credit score. Adding a mortgage to revolving debt (credit cards) can greatly improve a person’s credit score. As long as a person pays his or her mortgage on time, the debt is considered responsible debt.
What to Consider When Buying
So, how to buy a rental property to make it all happen? To make the most of the benefits mentioned above, plan ahead. Buying your first rental property will not be a linear process. There may be a number of detours necessary for a smooth transition into the world of property ownership. Some of the most important things to consider when starting a business in rental properties include the following questions.
Do you have sufficient resources connected with the buying process?
Sufficient resources include more than the money needed to buy a property. The final amount of money a person needs might be much higher than he or she anticipated. The associated costs include property maintenance, property inspections, utilities, insurance, and more. Also, repairs might be needed to transform the property into an appealing rental unit. You never know what emergencies can happen and when. Therefore, having a cash cushion equal to three to six months of the owner expenses associated with the rental property can help in the event something happens, especially if it’s your first rental unit.
Do you have the needed documents to stay legally sound?
As in any other business, a landlord needs to be ready for challenges along the way, whether it’s unexpected disasters, accidents involving the tenants, or any other events that are difficult to predict. Before scaling your rental business, be sure that everything runs smoothly by having the right legal documentation in place.
You can download the Lawrina Business Templates Pack for easily manageable and up-to-date templates. From the Real Estate Purchase and Sale Agreement to the Residential Lease Agreement, you’ll find the templates needed for every significant step of your real estate rental business journey.
Also, you can quickly get your legally binding Rent Agreement by filling out this rent agreement form. Just answer the required questions, and then all it takes is just 5 minutes to download your agreement.
Can you cover monthly expenses for your property?
Even if your property is successfully rented, the list of monthly expenses might be quite long, and you will need to ensure that you have enough money to cover everything. Some possible expenses include property taxes, tax on rental income, insurance, property maintenance, and property management. Remember that there are many rental property tax deductions available to property owners since almost every amount spent on the upkeep of a rental unit qualifies as a business expense. However, these expenses must be paid usually on a monthly basis.
Do you know how to manage your new business correctly?
This is the next question one should ask after “how to buy a rental property?” The best property rental businesses can be easily destroyed without proper management. The most sustainable choice is to hire a professional property manager, whether an individual or an agency. However, if you decide to manage everything yourself, you will need to have a detailed financial management plan when buying your property. Some of the questions you will want to consider as a property manager include:
- How am I going to advertise my property? Which channels or marketplaces do I choose?
- How can I do personal background checks before renting my property to anyone?
- Which resources will I use for the property maintenance? How can I finance the expense?
What is a good capitalization rate?
The capitalization rate is an important factor to consider when making a real estate investment. To put it simply, the capitalization rate is the return on investment (ROI) that you would get if you paid all cash—the maximum investment amount is the full price of the property. A “good” cap rate depends primarily on the location of the property.
How to Buy Your First Rental Property
While making a decision about how to buy property, there are several things to consider in order to choose the best option. The following tips will help you to know what to look out for and how to invest in rental property:
Although there may be many challenges when arranging financing for your rental property, there are luckily a lot of options available. Long-term appreciation and positive monthly cash flow will depend on the type of financing you use.
Review the pros and cons of all the options available, from conventional lenders (banks and credit unions) to other investors, obtaining rental property financing through private lenders, or by forming a joint venture. It’s a good idea to reach out to a fellow investor to get a better understanding of the monthly or annual property costs that you may not have considered.
Create a comparative chart of all real properties you like
There are a lot of places to look online for a property. Find options that appeal to you the most and evaluate each option based on such factors as employment rate and population growth in the chosen area, percentage of renter-occupied households, rent prices dynamics, neighborhood ratings, and property tax rates in the state. The most important words in real estate investing are the right location. There is no more critical factor than the location of the property, which will determine all the factors mentioned above.
Estimate the likely rent
Take a look at comparable rentals in your chosen area to get the rent amount that will be the most appealing for your tenants. Keep in mind that there might be periods when a property is vacant, especially if it is an area with many student renters, and factor that into your calculated rent.
Double check all expenses
As mentioned before, the list of monthly expenses might be much longer than expected, so be sure that you have enough money to cover everything. Unexpected expenses can catch a person off guard. However, if everything is accounted for, you can budget accordingly.
Consider hiring a property manager
Being a landlord may turn out not to be as rewarding as you expected. For this reason, landlords often hire local property managers, which allows them to enjoy the benefits of owning rental property while avoiding the hassles of being a landlord. Professional property managers usually take care of day-to-day details so the owner can focus on growing other passive income streams. Some things to consider when hiring a property manager include:
- Portfolio of successful cases;
- Length of time in the rental management business; and
Be ready for imperfections along the way
This is an inevitable step in any journey. No project can be perfect. Be ready for unpredictable events, as it’s impossible to know exactly what will happen in the coming months and years. Whatever happens, you either win or learn. Everyone makes mistakes, but you can reasonably have accurate expectations that won’t lead you astray.
Alternative Strategies for Buying Your Rental Property
In case you don’t have a big down payment to buy a rental property, you can consider the following alternative strategies that require a lower purchase price:
Finding another investor
This step is easier than you might think. Real estate is a numbers game, and you never know when you will be talking about investing in front of the right person. So, you can unexpectedly find another investor willing to front the money and earn a decent return on investment. However, you will need to ensure that you are well-educated and committed and have a well-developed business strategy to present to a potential investor. You should have a clear idea of how to buy a rental property. When you know what you’re talking about, you will make your project more appealing to another person who is ready to invest money. Partnering with a fellow real estate investor can significantly reduce the amount of cash you need to purchase a rental property.
Using an FHA multifamily loan
You can spend less money by buying a small duplex or triplex and living in one unit while renting the remaining units. With the traditional FHA mortgage program, you can purchase a home with up to four units. The pros are that you can get favorable terms, such as a low down payment, and you may receive lower interest rates than you would with a typical multifamily loan.
If you dream of a profitable retirement plan with appreciation, passive cash flow, and tax benefits, buying a rental property may be the way to do it. Although rental properties do not always come with glamor and huge paychecks, investing in rental property is a proven method of building permanent income if done right.
Consider these tips for how to purchase a rental property when making your investment decisions. Always remember that a great rental property will make your investment dollars work hard.