How to Purchase Rental Properties
A rental property can be a great way to earn passive income and accumulate assets. Having rental properties can set you up for financial freedom, where you pay off your mortgage by collecting rent from your tenants. To purchase rental properties, start by determining which type of property is best for you. You should also consider the location of the property and assess your finances to ensure you are making a smart investment. Once you have found a good buy, make an offer and maintain the property so it is safe and hospitable for your tenants.
Determining the Property Type
Opt for an apartment or condo if you have a limited budget.If you do not have a lot of start up capital, go for a smaller rental property within your means. Look for an apartment or condo that you can rent out to tenants. An apartment in a low rise building or a high rise condo may be a better investment than stretching beyond your budget for a bigger rental property. They can also be more low maintenance than a house.
- Keep in mind some apartments and condos may have a property board that does not allow rentals. You will need to check into this before buying the property.
Go for a house if you have more of a budget for the rental.Look for a low-cost home that is within your budget. A residential single family home that is 0,000 USD and lower is usually a solid option for a rental property.
- Avoid looking at large, expensive houses, as this just means you are going to have higher ongoing expenses.
- A house will give you more autonomy as a property owner, as you do not need to worry about a property board. However, it will be a bigger investment than an apartment or condo.
Avoid fixer-upper properties.Fixer-uppers may be cheaper up front, but they will end costing you more in the long run. Renovating the property can be expensive and time consuming. Unless you are skilled at contract work or you have a contractor who can work cheaply for you, avoid fixer-uppers.
Look for properties that will withstand a natural disaster.Make sure the property is not built on a floodplain or in an area that has a history of hurricanes or tornados. You will end up having to pay for disaster insurance and risk losing your property or sustaining damage due to a natural disaster. Look for homes that have been outfitted to withstand natural disasters, especially if they are common in the area.
- Most properties will advertise that they are disaster proof and well built to withstand a flood or hurricane.
Choosing the Property Location
Get a property close to where you live if you are going to manage it.If you are going to be your own property manager, look for a property that is within walking distance or a short drive from where you live now. This will make it easier for you to get to and from the property, especially if you have to deal with your tenants. You should also plan to visit your tenants on occasion to check in on them. Living close will make this easier.
- Looking for a property close to where you live now will also make it easier for you to assess the neighborhood and amenities, as you will know about them by living in the area.
Look for a property near amenities like a shopping area or a grocery store.Amenities like a good school, a grocery store, a shopping mall, restaurants, movie theaters, and gyms are all a plus when looking for a rental property. Potential tenants may be more interested in living in an area that has a lot of amenities close by. It also makes the area more vibrant and welcoming, with a variety of services and entertainment to offer tenants.
- Try to look at properties that have at least 2-3 amenities within walking distance or a short drive away.
Avoid properties in areas with high property taxes.Property taxes can be a major expense when owning a rental property, especially when you are already paying taxes on your current property. Research areas where taxes for rental properties are low or capped so they do not become too high for you to manage.
- Keep in mind you will have to offset the cost high property taxes by raising the rent for the property. This may turn potential tenants away, especially if the rent continues to go up so you can afford rising property tax.
Stay away from high crime or high vacancy areas.Search online for areas that are known to have a high crime rate and avoid them. Go for areas where crime is low and the neighborhood is considered safe to live in. You should also be wary of areas with a lot of vacancies or a high property turn over, as this can signal the area is not doing well or it is not a great place to live.
- In some areas, high vacancy rates can be seasonal, especially if the area is populated by a lot of university students. You should still avoid these areas, as a low vacancy rate will ensure the same people live in the area year round and the neighborhood is stable.
Research the average rent in the area.Do a search of rental properties already in the area to determine how much rent costs. The average rent should be enough to cover your mortgage payment, taxes, and maintenance expenses. If not, keep looking until you find an area where the rent is enough to cover your expenses.
- You should also look at how the area is developing and whether there is a large gap in average rent costs. This may mean property taxes are going up and you may not be able to afford the rental property later on.
Talk to other renters or homeowners in the area.This will help you get a sense of the neighborhood and the quality of life in the area. Knock on doors and introduce yourself as a prospective buyer of a property in the neighborhood. Ask renters and homeowners if they like living in the area and feel comfortable. Find out if they feel there are enough amenities in the area and if rent prices are reasonable.
- You can also ask homeowners about property taxes and whether they think their home was a good long-term investment.
Assessing Your Finances
Make sure you have no debt.Clear any student loans or credit card debt before you consider purchasing rental properties. Having existing debt will put you at risk of losing more than you can afford. You may also have difficulty getting enough startup capital to buy a rental property if you have debt.
Confirm you have enough capital for a down payment and startup costs.You will need to be able to afford a substantial down payment, especially if you are buying a house. Make sure you have enough fund for the down payment and any initial startup costs.
- If you buy a property in good condition, you may not need to put too much capital into the house to make it rentable.
- If the property needs some work, you may need to set aside several thousand dollars so you can fix it up and make it attractive to potential tenants.
Get a loan from your bank for the down payment.Inquire at your bank to find out your financing options. You will still need to pay at least 20% of the down payment to qualify for a loan. In some cases, you can use the equity in your current property as collateral for a loan. Keep in mind your current property will then be used as security for the loan.
Determine your operating expenses.Add up your monthly mortgage payment, your property taxes, and your insurance costs. Set aside a generous amount for the cost of repairs and maintenance. Divide your total expenses by 12 so you can determine your base rent costs.
- Your operating expenses should make up 35-80 percent of your gross operating income. So, if your expenses are 0 a month and you charge ,500 for rent, you would make 40 percent gross income. Aim for around 40-50 percent at least so you can turn a profit.
Calculate your return on investment.Determine how much money you earn for every dollar you put into the rental property. Begin with a 6 percent return on investment for your first year as a rental property owner. Your return on investment percentage should go up every year, especially if your property taxes and mortgage payments do not go up.
- If you are making lower than a 6 percent return, you may need to charge more in rent to ensure you are covering your operating costs and turning a healthy profit.
Making an Offer
Go through a real estate agent.Hire a real estate agent who is familiar with rental property negotiations. Make sure the real estate agent knows the area where you are looking well and is able to broker a good deal for you. Your real estate agent will fill out purchasing paperwork and submit your offer to the selling agent for the property.
- Your real estate agent will then negotiate the sale of the property with the seller and their agent. Make sure you are comfortable with the final selling price of the property before you sign any buying paperwork.
Get a full property inspection done.Before you sign the final papers to buy the property, get a full inspection done by a certified home inspection service. Make sure the property is free of any hazards and the foundation is solid. The inspection should ensure the property is safe for tenants to live in and is a good long-term investment.
- If you do find any defects or issues with the property during the inspection, weigh out the costs of repairs and maintenance. Make sure costs are affordable and will not put too much of a dent in your profit margins.
- If there are major issues or defects with the property, you may decide to walk away from the property and look elsewhere.
Do maintenance on the property so you can rent it out.Make the property attractive to potential tenants by doing small maintenance jobs like painting the walls and baseboards, cleaning the windows, and installing appliances. You may also remove any dirty flooring or carpet and repair any dents or scratches on the walls.
- If the property has a yard, clean up the yard and mow the lawn so it is more attractive to tenants.
- Make the property as livable as you can, within your budget, so you can rent it out quickly and easily.
Video: How To Buy Your First Rental Property (Step by Step)
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