Buying rental property can be a great step towards building wealth and securing your financial future. There are many people who have become very wealthy through purchasing rental properties, so there are ample reasons to think that rental property is a sound investment. However, there is a common misconception that real estate investing is always lucrative. While this is true most of the time, investing in rental properties isn’t an instant road to wealth. Before you decide to go ahead and purchase your rental property, it’s better to be well-versed. Learn how to purchase a rental property before diving in with thousands of dollars. Here are 7 real estate tips for buyers to help you get started.
7 Tips on How to Purchase a Rental Property
1. Set Your Real Estate Investment Goals
One of the most common mistakes when purchasing rental properties is not setting financial goals first. Understanding your end goal and writing a business plan is the first crucial step towards purchasing rental properties. In order to put yourself in a much better position to succeed in real estate investing, you should understand exactly what you want to achieve. This way, you will be able to purchase rental properties that are in line with your investment goals. Your goals will determine the type of rental properties you buy, your optimal rental strategy, and even your financing method.
However, make sure your goals are realistic and based on your financial capabilities. How many rental properties do I want to own? How much money do I want to invest in rental properties? Do I need immediate cash flow? These are some of the questions you should be asking yourself before you invest in real estate.
2. Partner with a Real Estate Agent
As a beginner real estate investor, it would be wise to work with a real estate agent when purchasing rental properties. Real estate agents have broad real estate knowledge and experience and would help you avoid some of the common pitfalls. Partner with an agent that understands your target housing market and who has experience working with rental properties. A good agent will guide you on how to purchase a rental property and keep you focused on your goals.
Find a real estate agent in your area here!
3. Put Your Emotions Aside
When it comes to purchasing rental properties, you need to think logically and not just follow your heart. Buying investment property is different from buying a property you plan to live in. You need to keep the market in mind. Don’t let emotions lead you to buy a rental property based on personal preferences. If you are emotional, you could end up paying more for a property than it is actually worth. To make good investment decisions, you have to stay objective. Look at purchasing rental properties as a financial deal, just like purchasing stocks or any other investment.
4. Research Your Target Real Estate Market
Location is the most important factor when purchasing rental properties, both on the city level and neighborhood level. The best places for buying rental property are those that would attract good tenants. Such locations usually have the highest occupancy rates. Doing a thorough real estate market research will help you identify the best place to invest in.
Some of the features a real estate investor should be on the lookout for when searching for a good rental market include:
- Nearby social amenities like schools, hospitals, restaurants, etc.
- Low crime rates
- Booming job market
- High population growth
- Tourist attractions
- Public transport
- Development plans
The easiest way to find the best rental markets is by using Mashvisor’s heatmap analysis tool. This tool helps investors to conduct a local real estate market analysis based on real estate metrics like rental income, cash on cash return, and occupancy rate. With this tool, you can analyze any rental market across the US.
5. Beware of Local Rental Regulations
You don’t want to pay thousands of dollars for an investment rental property and find a renter, only to find out the hard way that your property is not legal as a rental property. To avoid expensive surprises, make sure you study the local rental regulations before you purchase a rental property.
For instance, if you are purchasing a vacation rental property, make sure you are aware of any short-term rental restrictions. In some cities, non-owner occupied Airbnb rentals have been banned. Therefore, if you plan to list the property on Airbnb, it has to be your primary residence in such areas.
Related: The Ultimate Guide to Buying an Airbnb Property with Ease
6. Know Your Potential Return on Investment
Return on investment (ROI) is a very crucial factor when purchasing a rental property. It is used to assess the potential of income property for sale. You can’t say you know how to purchase a rental property if you don’t understand ROI and how to calculate it. ROI is basically an estimate of the potential profit of a particular rental property as a percentage of its cost. What are you getting back out of your investment? Is the risk taken worth it?
A good rental property should have a high ROI. With Mashvisor’s rental property calculator, you can calculate ROI metrics like cash on cash return and cap rate and much more for rental properties in the US housing market. This amazing real estate investment tool uses accurate property data and predictive analytics. We recommend rental property investors to use it for their rental property analysis because it is user-friendly, accurate, and fast.
Related: How to Get the Highest Return on Investment Property
7. Weigh Your Investment Property Financing Options Carefully
Another important tip for buying rental property is to be financially prepared. You need to line up your financing early. Your financing method will impact your potential returns and financial well-being. Therefore, you need to weigh your options carefully. Different financing methods come with different costs and benefits. The right financing option for you will depend on your investment goals and financial standing. If you are going to take an investment property loan, compare the interest rates, down payment, and other requirements.
Many people thinking of purchasing rental properties don’t want to lock their cash or simply don’t have enough money for a down payment. However, it is still possible to purchase a rental property with no money down. You can consider finding an investment partner, house hacking, seller financing, home equity lines of credit, etc.
There are many options when it comes to financing a rental property. Whichever method you choose, just make sure it is in line with your investment goals. If you are buying your first rental property, you may want to seek advice from experts.
The Bottom Line
Purchasing rental properties is a great way for investors to create a stable source of income and build wealth. However, it also comes with its fair share of risks that could lead to financial distress. By keeping the above strategies in mind, you will be able to avoid the common pitfalls and improve your rental property investment strategy.
If you are wondering how to find rental properties to purchase in the US housing market, Mashvisor tools are your best resource. Use our Rental Property Finder to find rental properties that match your criteria and investment goals in a matter of minutes!