Buying your first investment property can be stressful and hard, but it can also be incredibly lucrative. That does not mean that precautions should be taken and lessons should not be learned. Do your researching and take your time to make sure that you know all there is to know about buying investment properties.
If you’re looking to get the basic facts, this is a good place to start. All you have to do is continue reading to get 22 tips on buying your first investment rental property.
1. Use Leverage from your existing property
If you are looking to become a real estate investor, make sure that you understand the mortgage market at the time that you are interested in making the purchase. If you get the right mortgage, it can help you keep costs low for renters. That will reduce any concern about the property’s cash flow. Using the leverage of a mortgage will free up some cash so that you can use for repairs and future investments.
2. Invest in Single-Family Homes First
If you are looking to purchase a number of investment properties, start with purchasing a single-family home first. That’s the easiest and most straight-forward way to get started as a new real-estate investor. The upkeep is easier than a multi-family or commercial property, and with only one tenant, there does not tend to be the same kind of wear and tear on the property. Also, when something breaks, you’ll only need to replace one thing.
3. Be Aware of Short Term Rental Restrictions
With the increase in short-term rental companies like Airbnb and VRBO, many cities around the country have begun to put restrictions on short-term rentals. Your condo association or HOA may have their very own restrictions as well. Be aware of any laws and read your HOA agreement before you buy a property to make sure that it can be used as a short-term rental, if that is something that you are interested in pursuing.
4. Screen Your Tenants before letting out
No matter if your property is a single-family, multi-family, or commercial property, make sure you screen your tenants with a background check, credit score check, and landlord tenant records. If they have poor credit or have been in landlord tenant court, you may want to reconsider whether or not you want to take the risk on letting them rent, and possibly faily to pay somewhere down the line.
5. Know Your Inherited Tenants
If the property is occupied when you buy it, make sure that those who are already living there are trustworthy. Meet with the previous property owner and look through their background checks, credit checks, and rental applications, as well as their rental payment history.
6. Break Down the Numbers, particularly interest cost
Make sure that you keep close attention to the numbers throughout the process. Inexperienced property buyers often start analyzing other factors and complicating the situation, but the place you should start and end is the math. Find out how much you’ll have to rent the building and for how long it will take you to break even on your initial purchase. If it takes too long, it is probably wise to just move on.
7. Focus on What Your Return Will Be including the debt
Make sure that you are not only investing on a good deal, but investing in an area that will yield a high return on your investment. You can still find some great deals in neighborhoods that are still undergoing gentrification. In order to obtain the higher return on investment, try to peg a specific area and know what houses are selling for in that neighborhood and try to find out where you can expect the market to go in the future.
8. Work With a Finance Pro to borrow
Always make sure to team up with some experienced professionals who understand leverage and opportunity cost in the finance world. True pros will be able to help you understand the numbers of any investment. They will also be able to provide clarity on what the actual cost of the asset will end up being and what your true margins are.
9. Talk to the Neighbors
When you are considering buying a property, go door-to-door and talk to some of the neighbors living in adjacent buildings. Explain that you are considering buying a nearby property and would like to know if they’ve had any experience with the tenants or current owner of the building you are considering purchasing. While you’re there, drive around the surrounding are and see what it’s like during the daytime and nighttime. It will give you good feel of how attractive the property and surrounding area may be to prospective renters.
10. Work With a Property Management Company
There is no rule stating that you have to go it alone when you purchase an investment rental property. Do you have the time and energy to answer phone calls or emails at all hours of the day? If the answer is no, then it’s definitely wise to consider hiring a property manager.
They’ll take care of a lot of the day-to-day heavy lifting and handle stuff like background checks, maintenance calls, interviewing potential tenants, and more.
11. Focus on Properties with Outdoor Spaces
A huge percentage of renters favor a cozy and comfortable place where they can invite friends over, enjoy time relaxing, feel at home in. For a lot of people, that means some kind of outdoor area or a large balcony. Generally, most tenants aren’t too picky about that kind of area, but they want it to be private, usable, and large enough to have a few people on. It can be a great way to attract tenants no matter the area.
12. Do Pro Forma Analysis
It is important to do a pro forma analysis on any property you are considering buying so that you can have a better idea of what you will expect to make going forward. Look at similar properties in the same area, how the rents have changed in the past decade, and how they are projected to chance in the next decade. Once you have the projected rent growth and estimated cost on operations and maintenance, you will have a better idea of how much net income the property will generate, and how much you can make in the future if you plan to seel it.
13. Consider Investing in a Vacation Rental Property
A great property to consider investing in is anything that can be thought of as a vacation rental property. Evaluate a potential vacation property and look at comparable rates on sites like Airbnb, VRBO, and HomeAway. In general, real estate will increase in value over time, but certain markets will experience even greater appreciation. Take a look at how the market has performed in recent years and identify what kind of growth you can expect. Additionally, make sure that zoning laws will allow you to rent out your home to guests.
14. Buy a Property Close to Apartment Buildings
Whether or not you are considering buying a commercial building or a residential building, you should look to buy in an area where there’s a proven demand for rental properties. If you are buying a residential building, buying near other apartment buildings will give renters another option when they want to move. If you are building a commercial building, apartments nearby prove that there are already a large population nearby and companies will likely look to rent in your building soon.
15. Balance Your Risk, keep an eye on borrowings
While real estate values can always fluctuate, people still need a place to live even when the economy is in a downswing. This can provide a steady income for rental properties. This is why smart and experienced investors understand the unique value of choosing the right rental property to balance out your risk. Always try to focus on areas that have a high rental demand, even during economic downturns.
16. Toss a Nationwide Net
Don’t feel compelled to only look for potential investment properties in your city or state. It’s smart to take a look at some of the best cities to buy property in and you may very well end up finding a property that is much more affordable and has a better return in a different part of the country. If you do end up going this route, it is definitely wise to find a great Realtor and a great property manager in that market.
17. Know the Rent Control Regulations
Make sure you are familiar with and knowledgeable about specific rental guidelines in the county of municipality that you are purchasing property in. The guidelines will explain the process for registering the amount of legal rent and how to determine annual rent increases. Knowing how much rent you will be able to charge, both in the first year of purchase and going into the future, will help you determine how sound of an investment you are making in the long run.
18. Talk to Other Landlords
It’s going to take a bit of time to learn how to really find and keep good tenants. If you want to skip some of the early growing pains, however, join a local landlord association or ask someone who has worked as a landlord for a long time to get advice on what to do and what to steer clear of. This kind of info will help you avoid pitfalls that could really impact your experience at the onset.
19. Buy What You Know
Invest in property in an area and niche that you are especially familiar if you can. If you’re a college alumnus, buy student housing property, if you are a military veteran, consider buying rental property near a military base, or if you’re a ex-pat of a different country consider buying property in areas with a high immigrant population. This kind of first-person knowledge will allow you to communicate better with your potential tenants. They will understand and trust you, and you will have an easier time developing a productive and professional relationship.
20. Buy a Multifamily Property You Can Live In
For investors who are looking to make a multifamily investment, an FHA mortgage provides the best combination of interested rate and down payment amount. For properties with two to four unites, FHA mortgage rates are approximately one percent point lower than a comparable conventional rate. This will save you money in the long run and allow you to keep tabs on what is going on in your building on a day-to-day basis.
21. Keep Tabs on the Economy
When planning your investment strategy, pay attention to the economy and where it is in an upward or downward cycle. The recession stage is the best time to buy, but it can also be the most nerve wracking. The reason for that is because there are most vacancies and more properties available to purchase. There is no telling, however, if the recession has reached its lowest point, or if the economy can sink even further. On the other side, if you are planning on making a purchase during a recovery phase, properties will be more expensive, but you will be able to have more confident that you can make good on your investment. Key indicators to look out for is rising inflation and increasing interest rates.
22. Choose a Location Near Amenities
When you are looking to zero in on an property to purchase, pick a location close to public transit stops and amenities such as super markets, convenience stores, and more. Rental properties near Universities are also great places to buy property because many students will rent for the 4 years that they are in university. Beyond that, because students typically do not have the credit or income to qualify for a lease on their own, they will get a consigner from a parent. That means experienced renters who have far more income security than younger and less established tenants.