How to Buy Your First Rental Property
How to Buy Your First Rental Property
Owning a rental property can be a great way to start investing in real estate. However, buying your first property is just a small portion of running a successful rental business. If approached with no strategy, this can result in long vacancy periods or unfavorable experiences with tenants.
To avoid that from happening, we share our best tips for buying your first rental property and important factors to consider as a soon-to-be landlord.
7 Tips for Buying Your First Rental Property
Managing a rental property can become stressful as a DIY landlord, but there are ways to make the process of buying and managing your first rental property easier. Here are nine tips to keep in mind as you go through each step.
1. Determine if You’re Ready to Become a Landlord
Even though many consider rentals as a way to generate passive income, there are still some responsibilities that will need to be handled throughout the year. In addition to managing tenants, becoming a landlord requires you to create rental applications, lease agreements, collect rent, and handle sudden maintenance issues.
For that reason, it’s advised to determine if you’re ready to become a landlord prior to buying an investment property or if you’ll want to hire a property manager instead.
2. Secure a Larger Down Payment
There are various ways to finance rental properties — all of which may require more in a down payment and overall fees than owner-occupied properties. Most mortgage loans require a down payment anywhere from 3% to 20%, but some real estate loans require a minimum of 20% of the asking price since there’s a higher risk to financing an investment property.
Not all lenders require 20%, especially if you can purchase mortgage insurance, but having a savings account can help you cover any down payment or property-financing expenses.
3. Find Local Investment Properties
The types of properties worth buying are located in a great area, offer in-demand amenities, and are close to highly-rated schools. You can either work with a Realtor that specializes in real estate investing to help you find investment properties or you can use websites like Realtor.com® to find properties yourself.
You also have the option to work with a local wholesaler or buy a foreclosure from a courthouse auction, but those properties may require more work to get them ready for tenants.
4. Create a Rental Property Business Plan
Creating a rental property business plan can be a great way to determine the goal of your business, your strategic plan, and outline the objective of your business. Although not required, establishing a plan prior to launching your rental business can ensure you enter the market prepared to handle hiccups with ease.
5. Determine Your Rent Price and Operating Expenses
Both your rent price and any operating expenses you expect to pay will need to be identified to determine your property’s profitability. Some landlords explore rental sites to see how much other landlords are charging for similar properties.
Operating costs can include costs like maintenance repairs, listing your property online, turning over an apartment, and tenant screening reports. Each cost varies depending on where your property is located, the amount of times you turnover an apartment, and how comprehensively you want to screen prospective tenants.
6. Purchase Landlord Insurance
You never know what could happen when renting out your property to tenants, which is why it’s advised to invest in landlord insurance. Most insurance providers offer policies with different levels of protection to landlords. However, tenants should still be required to purchase renters insurance to ensure their own belongings are protected during the lease term.
7. Familiarize Yourself With Landlord-Tenant Laws
As a landlord, you’ll need to follow local landlord-tenant laws and Fair Housing laws during the rental process to avoid legal situations that can damage your rental business. These laws can also impact how you handle rental security deposits, screen tenants, and evictions. By regularly checking your local laws and any changes that directly impact the rental industry, you can avoid any lawsuits or violation of any renters rights.
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