The concept of buying first rental property assets is one of the best ways to begin accumulating long-term wealth. A solid rental property can not only provide you with monthly cash flow, but can serve as the backbone of your retirement plan. The key, however, is finding the right property. Not every quality property you look at will make a good rental property. It takes the right mix of demand and location to maximize your return. If you have been interested in owning a rental, but weren’t sure what steps to take, here are some suggestions on buying first rental property assets.
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Why Buy A Rental Property?
Buying rental properties has become synonymous with today’s greatest wealth-generating vehicles. Few assets, if any, award investors with a greater return on investment over decades. Perhaps even more importantly, rental properties allow investors to make money passively if they hire a good third-party property manager. It is worth noting, however, that there are several reasons investors should buy their first rental property, not the least of which include:
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Buying first rental property assets can help investors establish a foundation for collecting passive income and generating wealth for generations.
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Passive income generated from buying your first rental property may act as a financial safety net and help landlords/investors in times of need.
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When you buy your first property and rent it out, the cash flow it generates can usually be used to pay down the mortgage and pad the coffers of investors for years, if not decades.
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Buying your first rental property gives you the flexibility to sell when the time is right. With consistent cash flow, owners aren’t typically forced to sell when they need more liquidity.
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Appreciation is never guaranteed, but history has taught us that home values increase more often than not. As a result, rental property owners can usually depend on the appreciation of their assets.
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Buying first rental property assets isn’t the only way to invest. That said, becoming a landlord is a great way to diversify any growing portfolio.
1. Do Your Homework
Buying any property and calling it a rental is not a recipe for success. Before you get too far, you need to plan what you want to do and how you plan on doing it. Are you looking for a single or multifamily property? What type of area are you looking to be in? Do you have a specific price range in mind? Are you going to manage it yourself or seek the help of a property manager? These are just a few of the questions you should answer. You should have a good idea of your goals and how you plan on achieving them before you do anything else. As rewarding as a rental property can be, they can also engulf your business if you get involved in a bad property. Once you know the area and type of property you are looking for, you can begin to get involved with the numbers.
2. Prepare To Be A Landlord
Becoming a landlord means different things to different people. On the one hand, becoming a landlord may mean learning how to become handy around the house; to others, it means hiring a third-party property manager. Those of the former conviction should take the time to learn about the infrastructure of homes. In doing so, learn about the amenities in most assets; that way they will be able to deal with things as they come up. More importantly, however, prospective landlords should look into third-party property managers. The help of a property manager will significantly reduce the workload of a landlord. In fact, those who hire property managers will find that their time is actually better spent on more valuable things than “being a landlord.” In particular, those who hire property managers can add more assets to their rental property portfolios without adding more work to their daily schedules.
3. Pay Off Personal Debts
There is no reason investors can’t have debt when they buy their first rental property. In fact, most people will go into debt buying first rental property assets. That said, owning a rental property can coincide with a lot of added expenditures. Landlords should have money set aside to cover any unexpected costs that arise. Consequently, setting money aside will be a lot easier if personal debts are significantly reduced. Therefore, it’s a good idea to get finances in order before buying a rental property.
4. Choose The Right Location
The golden rule of real estate investing still applies: location, location, location. Nothing is more critical to buying first rental property assets than their location. Proximity to desirable locations will contribute to demand and value, which will allow landlords to increase their rental asking prices. As a result, prospective landlords need to be aware of where they intend to buy. The location in which a property is located will determine many factors, not the least of which may dictate how the property is run. If, for example, the property is acquired in a tourist destination, it may be better served as a vacation rental. Properties close to college campuses may be best suited for student housing. Case in point: The home location will determine just about everything moving forward, so learn about a location before buying in it.
5. Choose The Right Type Of Financing
Most people that have never owned a rental property before think that all you need to do is find tenants and start collecting checks. There are two reasons that someone would buy a rental property: long term appreciation and positive monthly cash flow. Both of these start with what type of financing you use. The higher your monthly payment, the less cash flow that is available. Most investment loan programs require anywhere from a 20 to 30 percent down payment. Additionally, the homeowner’s insurance is typically higher than an average primary residence. Other fees must be accounted for with a rental. If you are using a property manager, they will typically charge 8-10 percent of the monthly rent. There are also landscaping and snow removal fees that must be accounted for. 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. Before you get any further, talk to your lender or mortgage broker to find out all of your financing options and the anticipated monthly payment. Also, reach out to a fellow investor to get a better idea on the monthly or annual costs for the property that you may be missing.
6. Invest In Landlord Insurance
Landlord insurance is important for any and every landlord. If for nothing else, it’s true what they say: it is better to be safe than sorry. Landlord insurance can protect landlords from losing their entire portfolio, if not more. This is, of course, in addition to homeowners insurance. Adding landlord insurance can protect against property damage, lost rental income, and liability protection.
7. Use A Real Estate Agent
There is a huge difference between making an offer for a primary residence than for a rental property. Like any purchase, you want to always get the best deal possible. On a rental property, every dollar spent is a decrease in monthly cash flow. Using a good real estate agent will help you get the best deal. With a plan and financing in place, it will be easier for your agent to get you the property you really want. 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.
8. Double Check All Expenses
Owning and operating a rental property can be overwhelming for investors who have never served as a landlord. In particular, unexpected expenses tend to catch new investors off guard; that’s why it’s a good idea to know all of the expenses you may be confronted with over the course of ownership. That said, it’s not enough to assume expenses; you need to make sure you know everything. New investors must account for every single operating expense possible. Only once everything is accounted for can investors truly budget accordingly.
9. Know Legal Obligations
Landlords are held to strict legal obligations. In addition to the leases their tenants sign, each state will levy their own laws, to protect both landlords and tenants. That said, it pays to know the laws you must abide by when acting as a landlord. Nothing will derail a successful real estate investment faster than ignorance of the law. Before buying a home, make sure you know exactly what you are getting into and the steps you can take to mitigate risk.
In landlord-tenant law, landlords are responsible for five key areas. First, landlords must oversee the management of the security deposit. Landlords always have the right to charge a security deposit, but there are state laws that dictate how much can be charged. A landlord is also required to disclose the owner of the property. Essentially, this disclosure means clearly telling the tenants (often in writing) who owns the building and how to contact them for rental payments, maintenance issues, and more.
Landlords are also in charge of disbursing keys, or delivering possession of the unit to tenants. This is typically done after the lease is signed or at an agreed upon time. Once tenants are in the unit, landlords are required to maintain the property as decided by the lease agreement, and state laws. Finally, landlords are legally obligated to a certain degree of liability which is again outlined by that state’s laws. Always confirm with state and local laws to ensure you meet the correct legal standards as a landlord.
10. After Your Offer Is Accepted
From the moment that your offer is accepted, you are on the clock. Depending on how long you have to close, you may be forced to act quickly. You should know what work, if any, you want to do to the property. From there, you should start making calls for who you want to do it and if they are available. If you are using a property manager, you should start interviewing them and seeing if they are a good fit. It is also not too early to start looking for new tenants. Of course you have to wait until you take ownership to show the house, but you can place an ad online with the address and description to gauge interest. You must take your time to find the best possible tenants. Many new landlords will rent to the first person that applies. 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. Once you close and have someone in the property, the fun can begin.
Buying Rental Property Risks
There are a few risks associated with rental properties, including vacancies. Do not buy a property assuming it will be rented 365 days out of the year, every year. There will inevitably be vacancies, even if they are only short breaks between tenants. Many beginner investors forget to account for these periods before going in. Always leave yourself a little room in the budget to predict vacancies from time to time — especially when you know a lease term is ending.
Other risks associated with rental properties include maintenance issues and potential exit costs. Essentially, surprises can pop up when owning a rental property, such as an appliance breaking or water damage forming. When these events happen, it’s your job as the property owner to cover the repairs (and quickly, especially if its required by the lease). Investors need to consider the potential for maintenance costs to eat into their monthly profits, after all properties require upkeep. Exit costs simply refer to the time it may take to sell the property one day. If the time comes when you no longer want to manage your investment, it may take time to sell the property. Keep this in mind as you analyze other potential investments, and be sure to pick an attractive market to help mitigate the risks.
Summary
Buying first rental property assets is a big step on the way to operating a cash flowing rental portfolio. With several properties producing rental income, investors may collect rent passively, but it all starts with buying your first rental property. However, it is important to note that the first rental property will set the tone for how things proceed. In order to realize success, start out on the right foot with these tips, and make your first rental property your best investment decision ever.
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