How To Buy Your First Investment Property
Purchasing a rental property is one of the largest assets you can buy. With a little bit of time and effort, it can provide you with monthly cash flow and long term passive income. If you’re toying with the idea, here are some things to consider.
Do your homework.
Buying any property and calling it a rental is not a recipe for success. You need to map out a plan. Are you looking for a single or multifamily unit? Are you going to manage it yourself or lean on a property manager? What type of area are you looking to be in? If the property is in a tourist destination, it may be better served as a vacation rental. Properties close to college campuses may be suitable for student housing. The home location will determine just about everything moving forward.
Get finances in order.
Most investors will go into debt buying their first rental property. Landlords should have money set aside to cover any unexpected costs that arise. This will be a lot easier if personal debts are significantly reduced. If you are financing, you’ll need to get pre-qualified for a loan before you make an offer on an investment property. Items your lender will look for include:
A credit score of at least 680
Job history over the last two years plus tax returns
Cash on hand for the down payment
Detailed list of all assets and liabilities
Low debt-to-income ratio (DTI) of 36% or less
Are you ready to become a landlord?
Having tenants may mean learning how to become handy around the house. Take the time to learn about the infrastructure of homes to be able to deal with things as they come up. On the contrary, most successful investors will hire a third-party property manager to reduce the workload. In fact, those who hire property managers will find that their time is actually better spent on more valuable things than “being a landlord.”
Double-check your expenses.
Owning a rental is more than just finding tenants and collecting checks. You should account for the fees that come with a rental. The type of financing you choose will determine your monthly payment, which determines your cash flow. Remember, the homeowner’s insurance is typically higher than an average primary residence. A property manager will typically charge 8-10% of the monthly rent. Finally, you need to have a reserve fund for the inevitable clogged toilet or broken appliance. You will often need more money than you thought, and the cash flow may not be as high as you anticipate starting out. Plus, home price appreciation is never guaranteed, but history has taught us that home values increase more often than not.
Make sure you know local law.
In landlord-tenant law, landlords are responsible for five key areas. First, landlords must oversee the management of the security deposit. A landlord is also required to disclose the owner of the property and how to contact them for rental payments, maintenance issues, etc. Landlords are also in charge of disbursing keys, typically done after the lease is signed. Once tenants are in the unit, landlords are required to maintain the property as decided by the agreement. Finally, landlords are legally obligated to a certain degree of liability which is again outlined by that state’s laws.
Get good tenants.
Good tenants are the backbone of any rental property. You must do your due diligence on every applicant to make sure they are a good fit. From the moment that your offer is accepted, you should start seeking tenants and interviewing property managers. Once you close and have occupants, the fun can begin.
Ready to take the leap?
You can read books and listen to podcasts until you’re blue in the face, but at some point, you’ll have to take the leap and make that first offer. This can feel a lot less daunting if you lean on a real estate agent to be your guide. With a plan and financing in place, using a good real estate agent will help you land the best deal. The most important thing at this stage is to remain patient. It is better to wait a few extra weeks or months to get a better property. Start out on the right foot with these tips and you’ll be on your way to regular monthly cash flow and long-term appreciation.