If you are looking for a way to generate long-term wealth, consider investing in rental properties. Real estate investing in long-term rentals or short-term rentals can provide monthly positive cash flow and even be part of your retirement plan. However, like other business ventures, buying a house to rent requires some level of understanding. While you don’t have to be a real estate guru to own property, you should have a basic idea of what to look out for when buying your first rental property as well as the risks of real estate investing.
Here is what to know when buying your first rental property:
1. Decide what you want first
Before you go out looking for a rental property for sale, you need to decide what exactly it is that you want. Are you looking for a multi-family home, condo, apartment or single-family home? Do you want to invest in long-term rental properties or vacation homes? Which neighborhoods would you want to invest in when buying your first rental property? How much would you be willing to spend on a rental property? What kind of tenants are you targeting? Having the answers to these questions will help you take the next steps towards investing in rental properties.
2. Location is everything
Once you have decided what you want, the next step is choosing the right location for buying a house. Your rental should be situated in an area that will attract the kind of tenants you hope to rent to and generate the return on investment you are targeting.
If possible, visit the neighborhood to get a feel of the surrounding economy and culture. Interact with the residents and ask questions about what it’s like to live in the area. However, don’t just base your decision on your personal likes and dislikes. Use real estate investment tools to conduct a neighborhood analysis.
A neighborhood analysis is the process of analyzing the profitability of a location using metrics such as the listing price, average rental income, cash on cash return, and occupancy rate. For buying your first rental property, you should be using an easy and interactive tool like a real estate heatmap. And be sure to look at these neighborhood metrics for both traditional and Airbnb rental properties– this will ensure you’re making the right choice when it comes to the rental strategy.
3. Your credit score matters
When looking for financing for buying your first rental property, your credit score is very important. Having a great credit score will increase your chances of securing a good mortgage, and will also help you get good mortgage interest rates. Generally, it is advisable to build a credit score of 720 or more before buying your first rental property. If your score is lower than 720, you might need to save up more money to pay a higher down payment.
4. There are multiple options for investment property financing
Before you make an offer on any rental property, you must ensure that your financing is in order first. The good thing about purchasing rental properties is that there are numerous financing options to choose from. If you want to buy a rental property with no money down, you have the option to house hack and apply for an FHA loan. For long-term rental loans, try traditional mortgage lenders such as banks. The down payment for rental property is usually between 20 and 30%.
Related: 6 Types of Loans for Investment Properties in Real Estate
5. Negotiation skills are a must
The key to getting a good deal on your first rental property is negotiating effectively. Negotiation when buying your first rental property begins with seller research. Learn as much as possible about the seller before getting on the negotiation table. Why are they selling? How desperate are they? If the property is owner-occupied, when are they moving out? What is the current condition of the real estate property? Once you have collected all this information, make the lowest offer you think the seller would take seriously. The more desperate they are, the lower that figure can be. However, before you even begin negotiating, decide the maximum amount you are willing to spend. Your offer should be based on a comparative market analysis (CMA). This requires that you find real estate comps to determine the property value.
If the seller doesn’t accept a number under that ceiling, just walk away. If they don’t find another buyer, the seller is likely to call you back later and accept your offer.
Related: 8 Negotiation Tips for Buying an Investment Property
6. Real estate agents can be very helpful
As a first time real estate investor, it is easy to make a mistake in the process of buying your first rental property. This is why you should consider working with a professional real estate agent. A local agent that is familiar with the area you are targeting can help you find rental properties that match your objectives quickly. With their experience in negotiating on behalf of property sellers or buyers, realtors can also help you get the best real estate deal possible. In addition, real estate agents will come in handy when dealing with the paperwork and contracts involved in purchasing a rental property.
7. Emotions have no place in real estate investing
When buying your first rental property, it is very important to remain objective at all times. In your search for the right income property, don’t get emotionally attached to a house just because you love the kitchen or the view from the balcony. As it may turn out, buying a distressed property with an ugly bathroom and an outdated kitchen may make for a better return on investment. Ultimately, all of your decisions should be based on investment property analysis. Analyze every property you’re eyeing using metrics like cash flow, cap rate, cash on cash return, and occupancy rate. You can do this in minutes using Mashvisor’s rental property calculator.
Related: How To Do Investment Property Analysis
Similarly, don’t get carried away during the negotiation process and make an offer that exceeds your budget. Keep yourself detached during the whole process to avoid making mistakes. Above all, you will need to be patient through the whole process in order to get the best deal available.
8. Property inspection is very crucial
One thing we cannot neglect when discussing what to know when buying your first rental property is the importance of a home inspection. You need to examine the house to ascertain its current state. It would be advisable to hire a professional home inspector for a proper inspection. A home inspection will show you whether the real estate investment is worth your money at the end of the day.
9. You don’t have to become a landlord
For a lot of people, it’s not the property search or all the numbers involved in real estate investment analysis that keep them from buying a rental property- it’s not even the debt! Instead, it’s the thought of becoming a landlord and having to deal with tenants, complaints, clogged toilets, and late rent. Being a landlord is not for everyone, but investing in rental properties can be for everyone thanks to professional property managers. If you know deep down inside that being a landlord is simply not right for you, hire a property manager and enjoy the passive rental income instead.
Now You Know What to Know When Buying Your First Rental Property!
Learning how to buy rental property now will pay off in the long run. With proper real estate market analysis and investment property analysis, it is possible to make a good profit margin. Whether you prefer passive real estate investing or active real estate investing, buying rental property makes for a good investment. Keep in mind our list of what to know when buying your first rental property and start your search for a profitable rental property today.