Real estate is among the most reliable investments one can make. Owning rental property is a long-term-investment that can help you build wealth and secure your future. It’s also important to understand that owning rental real estate is a lot of work. And, just like any type of investment, it’s important to educate yourself before you take the plunge. In this article we’ll review what you need to know before buying your first rental property.
How to Invest in Rental Real Estate
Is rental real estate the right investment?
Different people invest in real estate for different reasons, so take some time to decide why you’re investing. This will affect every other decision you make. Rental real estate is usually seen as a stable long-term investment, as opposed to buying and flipping houses, which is riskier, and all about short-term financial gain.
Get your finances in order
The first step in getting ready to purchase a rental property is making sure you’re in a good financial place to do so. That means paying down any debts you may have—credit cards, student loans, unpaid bills—and working on your credit score. Like any real estate purchase, rental real estate will require some form of down payment, so work on saving at least 20% of the expected purchase price so you can make a healthy payment upfront.
Find the right location
Before you start looking for the right property, look for the right location. Ideally, you should buy a rental property in a city or neighborhood that is on the rise, not in decline. Look for an area with a low crime rate, decent school district, a solid job market and access to amenities.
Choose a low-cost home… but avoid fixer-uppers
It can be tempting to buy an old house that’s in rough shape, thinking you’ll save a ton of money. But unless you know a contractor who works on the cheap, or you happen to be an expert on renovating houses and have the time to do it yourself, it’s usually best for first-time rental property investors to avoid fixer-uppers. The holy grail for rental property investors is an affordable home that requires few repairs.
Securing a mortgage to buy a rental property can be challenging, especially if you’ve never done it before. Ultimately, the process is very much the same as it is when purchasing a home as your primary residence, but with a few key differences. When it comes to rental properties, lenders tend to be stricter when looking at your credit score, down payment, and debt-to-income ratio. You may also end up paying a higher interest rate.
Understand your ROI
Before purchasing a rental property, take some time to calculate your Return on Investment (ROI) on that property. That involves adding up all the expenses that come with that property, and comparing it to your projected rental income.
Are you cut out to be a landlord?
This is an important question, and ultimately one that you should be asking yourself upfront. Any landlord will tell you that owning and maintaining your own rental properties is like having several full-time jobs all at once. If that doesn’t sound appealing to you, that’s okay. It doesn’t mean you can’t own rental property. But it does mean that you’ll need a great property manager.
Learn more about property management
As an investor in rental real estate, few resources can help you out more than a quality property management company. Property managers help you get and keep more long-term tenants, and handle tasks ranging from repairs and maintenance to collecting rent and accounting.
Contact us today to learn more about why rental property owners benefit from rental property management.