Looking to purchase and profit from a rental property? In this article, we're going to give you some important tips on how to buy a rental property. These are the steps every budding property investor should take to pick a good cash-generating rental property. By following these steps, you’ll be well prepared to buy your first rental property. As a form of real estate investment, buying a rental property is considered to be a very good one.
You should buy a rental property if you want to diversify your holdings beyond stocks and bonds. The biggest advantage of buying a rental property is that it's a passive investment that required very little day-to-day management from owners or landlords. The other advantage is that you start earning a return on your capital investment immediately in the form of rent. Imagine this – After you make the down payment and pay all closing costs, the renter pays off your mortgage. How good is that?
However, it requires due diligence, on your part, to ensure you get the best return on your investment. Just like any business, purchasing a rental property to earn monthly income can be a bit risky too. Remember, choosing the right property, maintaining it, dealing with tenants—all that takes work. Investing in a rental property is not as easy as investing in stocks. From the first decision to get into the landlord's biz to buying a building, the idea may be daunting for the first-time investor. Real estate is a tough business so you need careful planning before putting down your money in rental properties.
Finding good rental property deals can be a difficult task to accomplish. A bad rental property deal will make you no profit or even worse, it can lead to a financial loss. Therefore, as a naive real estate investor, you should opt for buying off-market rental properties from turnkey real estate companies. A rental property should be turnkey and rent-ready. A good rental property is fully refurbished or a new construction residential property. The property must be in growth markets and must produce a positive cash flow. The property must have a good appreciation potential.
Norada Real Estate Investments helps take the guesswork out of real estate investing. By researching top real estate growth markets and structuring complete turnkey real estate investments, they help you succeed by minimizing risk and maximizing profitability. Our investment properties for sale are at or below fair market value – which means there is a potential for more returns on your investment.
For beginners looking to invest in a rental property, it is frequently placed in the category of income sans work. However, it’s not like that at all. Although it qualifies as passive income, that doesn’t mean you’re not going to buckle down. If you choose to manage the property yourself, you must know that unlike stocks it is not hands-off management. You will be required to do a lot of work for managing the rental property as well as your tenants.
Making money in real estate is not necessarily as easy or as simple as you’ve been told. Even if you hire property managers to help you manage your rental properties, you still have to manage them. Buying rental property is not for everyone. It should be an investment option you consider only once you’ve achieved a certain level of financial independence. If you do it right, you can put yourself on the road to success with cash regularly flowing into your bank account.
13 Tips On How To Buy Your First Rental Property
When seeking to buy a rental property, you must tread cautiously. This will help you to avoid common risks in rental property investing. Investment real estate, although a highly profitable business, is also equally a very tricky one. There’s a lot to be wary of including con agents and dealers, substandard properties, and exorbitant charges among others. It’s just important that you exercise caution before buying anything. Here are the 13 tips that you must follow when buying a rental property for passive income generation.
1. Buy Rental Property In The Best Location
As you already know, “Location, Location, Location” still rules and remains the most important factor for profitability in any form of real estate investment whether it is “fix and flip” or rental property investing. Before you get your heart set on a specific location, bring your rental property’s location into serious consideration.
- Find out what is the crime rate in that location.
- Are there schools close by and how are they rated?
- How far are the amenities like parks, supermarkets, transport hubs, and restaurants?
- How good is the rental property market in that location? What are the comparable rents and purchase prices?
- How is the economic development of the area?
- How the locality is expected to evolve over the investment period? If the area develops, the rent price will increase and so will your income and vice-versa.
2. Choose The Right Rental Property Markets
When choosing a rental market, it is always best to select one that is best aligned with your investing goals. For example, an investor who only wishes to go in it for the cash flow (and not appreciation) should probably opt for a more stable market. These markets won't fluctuate upwards or downwards, and they won’t be growing at a very rapid pace. The strength of the overall economy significantly impacts the real estate market. With the population, jobs, economy and industries, and mortgage availability moving upwards, the growing markets are always booming.
In growing markets the number of properties available to the population will be less, hence the demand for housing will increase. The increased demand leads to a rise in home prices. Strong real estate markets and increased job growth go hand in hand. Demand for all types of real estate increases with the number of local jobs, as during periods of economic development or boom. Additions to the local labor force tend to drive rents and prices upon rental properties in the vicinity. So, you get both a good property appreciation and a rent increase.
Population growth is also an indicator of a strong real estate market. When people from out of state move in, the rental property market gets boosted. Such increases in the population of renters and employment trigger a rise in the demand for housing. The market entered into a phase that favors sellers and it takes many years for supply and demand to become balanced again. Now as a rental property owner it means that you have an opportunity to capitalize on a unique investment opportunity.
Our picks are affordable and growing markets like Houston, Dallas, Oklahoma City, Memphis, Dallas, etc. However, it’s difficult to tell whether a given market is wise to invest in, and there is certainly no guarantee that anyone can give you. Timing a rental property market is also important. When it comes to buying rental properties, location is important but so is timing to a certain extent. The general rule is – Buy in a Buyer's Market. Sell in a Seller's Market. You should not buy near the top of the housing market cycle and see the value of your property fall and then wait several years for the market to rise again.
3. Buy Rental Property Using Leverage
As important as location, location, location is to buying, so is leverage, leverage, leverage. *David Reiss, a Professor of Law at Brooklyn Law School believes understanding the mortgage market helps keep costs low and reduces market cash flow uncertainty. Having a mortgage can also free up cash for repairs if needed for your potential investment. He goes on to say consulting a professional can save you time and money. Caveat Emptor. When going for leverage to finance rental properties, no lender will lend you money with no money down, and no seller will carry a note without you putting some money down even if it’s a promise to do money in the future.
There is no such thing as no money down in any type of real estate investment because the money is going to come from somewhere. In regards to buying investment properties with no money down, one of the best options you can try out is that of borrowing. There is a good deal of banks, financial firms, and private lenders out there who can readily loan you the amount you need to buy a rental property.
Importance of Leverage – If you do it right, you will be able to add more and more rental properties to your investment portfolio. If you wanted to buy $100,000 worth of stocks, you need to invest $100,000 out of your savings. But, if you want to buy a rental property that costs $100,000, you can use other people’s money to make this purchase. A bank or other lender will generally give you 80% of the purchase price. You just need to make a down payment of the remaining 20%. In this way, you can save 80% of your savings through leverage.
4. Choose a Single-Family House When Buying a Rental Property
New real estate investors should start with single-family rental homes. Why? Upkeep is easier as you only deal with a single tenant. Should something break and needs repair you only have to fix the problem once. Wear and tear on your investment are also reduced with single-family tenants. Following the housing market decline in 2007, single-family real estate investing became a favorable option for investors, saving on construction or refurbishment prices. The quick turnaround for an owner to rent out their property means cash flow is almost immediate.
Single-family rental homes have grown up to 30% within the last three years. Almost all the housing demand in the US in recent years has been filled by single-family rental units. The overall supply of single-family rental homes is flat, though demand isn’t. That is why rental rates were steadily increasing in 2019. Affordable rentals or those renting for 75 percent of the median rate saw rents go up 4 percent in 2019. That is due to the low supply of single-family rental homes in that price range. Given the growing price of land and materials, developers choose to build more luxury homes and condos than cheap affordable homes.
The higher-end single-family rental homes renting for 125 percent of the median rate only appreciated 3 percent in 2019. The growing returns for single-family rental investment have led investors to flood in, snapping up foreclosures and properties in need of major repairs. While fix and flip are popular on TV, fix, and rent out is a standard way to acquire discounted single-family rental investment properties. It has also forced real estate investors to compete with other investors for fixer-uppers.
5. Screen Tenants For Your Rental Property
Do a background check of your tenants before signing up for a lease agreement. Check their court records, credit rating, historical landlord-tenant disputes, etc. Doing so ensures you have a qualified tenant for your rental property. Failure to do so can cause a multitude of expensive problems and personal stress to name just a few. Landlords need to thoroughly vet their tenants to be on the safe side. Finding and screening tenants, doing paperwork, and ensuring low vacancy rates is not an easy job. This leads to losses especially if such rental property was your sole investment. The losses add up more if you have bought the rental property through a mortgage.
6. Learn About Short Term Rental Restrictions
Welcome to the world of VRBO and Airbnb. These short-term rental companies can turn buying a rental property into a nightmare. Some cities have legislated short-term restrictions on rentals. Roh Habibi, the Founder & Principal of TheHabibi Group suggests potential investors need to be aware of HOA and condo laws that may apply to your purchase. Before buying, you need to be sure it can be used as a short-term rental.
7. Do the Math For Your Rental Property
Why overcomplicate your life? Ask yourself this, will the rental payment cover your monthly mortgage cost? Maybe even make you a few hundred dollars. Experts believe that inexperienced investors should let the numbers speak for themselves. If you meet your mortgage payments, you probably have a good deal. Overanalyzing when buying a rental property is a complication you don’t need. The cost of borrowing money might be relatively cheap as of 2022, but the interest rate on your rental property will be higher than traditional mortgage interest rates.
The 2% rule says that for a rental property investment to be “good”, the monthly rent should be equal to or higher than 2% of the purchase price. For a $100,000 property, the monthly rent collected needs to be $2,000/month or higher to meet this guideline. You need a low mortgage payment that won't eat into your monthly profits too significantly. If you live in a city like San Francisco or Los Angeles or Seattle, rent will likely be your biggest monthly expense.
It may eat up a good chunk of your paycheck. Follow the 50% rule for operating expenses on your rental property. If the rent you charge is $2,000 per month, expect to pay $1,000 in total expenses. Operating expenses on your new property will be between 35% and 80% of your gross operating income. The normal operating expense ratio range is typically between 60% to 80%, and the lower it is, the better.
8. Buy Rental Property With A Good Rate of Return
Owning rental properties can provide investors with steady rental income or capital gains when sold for a lump sum profit. Profit is made on investment as a percentage of the cost of the investment. A cap rate of 7% or north of that number is considered very good for a profitable rental property. Generally, the average rate of return on investment is anything above 15%. When calculating the rate of return on a rental property using the cap rate calculation, many real estate experts also agree that a good ROI is usually around 10%, and a great one is 12% or more.
Amazing deals can be found by wise investors. To do so involves shopping the areas for what houses are selling for. Areas that are expected to transition to a more gentrified neighborhood should be prime investment targets. The biggest disadvantage of buying a rental property that you could face is the lower yield. While not always the case, most rental properties are priced much higher than the fair market value in that neighborhood, and that is because of the convenience they offer since they are already renovated and come with a tenant in place.
9. Consult Real Estate Finance Professionals
When buying a rental property, it’s important to deal with recognized professionals. Opportunity cost and leverage are needed to be known, in the financing world. These experts will help you understand the cost benefits and potential opportunity costs when using all cash. They will advise you on the actual revolving cost and true margins on the financial side of things.
10. Get A Written Lease Agreement For Your Rental Property
When renting your new property, having a proper lease is very important. With one in place, you can eliminate potential misunderstandings between you and the tenant. Some of these include rental payment and due date, termination fees, are pets allowed, insurance, ensuring the living space is clean, and even the heating temperature setting in winter.
When you have a written lease agreement, if there is a dispute at a later date, it can help clarify what was agreed to by both sides. On the other hand, if there is no lease agreement, then there is no authority for the landlord to make any deductions from the tenancy deposit – no matter how dreadful the condition of the property when the tenant moves out.
If he tries to make any deductions, any challenge made by the tenant will succeed at adjudication. Fortunately, when you have a lease agreement in place, there are several steps you can take as a landlord to mitigate any further damage and even cover the expenses to repair them.
11. Outdoor Space is a Bonus
And an appealing outdoor space helps a rental property attract and retain tenants. To rent to good tenants, consider buying a rental property with outdoor space. Most renters will enjoy having family and friends over for backyard BBQs, relaxing, and just spending time outdoors. If the area is private that’s a big plus to consider. Renters can then add personal touches to make the space an outdoor oasis to enjoy.
Outdoor space is desirable to prospective tenants, even if it is a patio, balcony, or fenced backyard. A usable outdoor space can be used for the kids to play or for pets to run free. If you can provide a small space to enjoy the sunshine and some fresh air, you'll be able to attract more tenants and select the very best. Having an outdoor space is always a bonus when it comes to renting.
12. Balance Your Risk
People will still need places to live even in a flat economic cycle. Your rental can be a steady income generator during a downturn. Choosing the correct rental property helps balance risk. Areas with a high demand for rentals will continue to generate income even when the economy is in a downturn.
13. Buy What You’re Familiar With
Like all your major investments in life, buy what you know. When buying a rental property, use your life experience to help you gain a competitive edge. Experts suggest looking for investment properties near your college campus. Another life experience to mine would be retired military near a military base. Properties near hospitals can provide rental opportunities for nurses. Your real-life experiences can make you a good investor.
Let Us Help You In Buying Your First Rental Property
The American Dream used to include real estate investing. If chosen carefully, real estate investing is likely to give steady returns in the long run. Buying a rental property, like most things in life, once you know the rules of the road it’s not as difficult as you first imagine. Fortunately, experienced real estate professionals or advisers are either a referral away or after some sleuthing on your own, added to your preferred supplier list. Go for reputed turnkey real estate companies and buy rent-ready properties.
A turnkey rental property is a great option for investors searching for passive income that requires as little active management as possible while still accomplishing a modest return on investment. Then, hire a good property management company that would find qualified tenants as well as manage the property on your behalf. When shopping for expertise remember, there are no stupid questions. But lots of stupid answers.
Consult with one of the investment counselors who can help build you a custom portfolio of turnkey cash-flow rental properties in the various growth markets across the United States. All you have to do is fill up this form and schedule a consultation at your convenience. We’re standing by to help you take the guesswork out of real estate investing. By researching top real estate growth markets and structuring complete turnkey real estate investments, we help you succeed by minimizing risk and maximizing profitability.
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