Some real estate investors are really successful. If you want to be a successful investor there’s a few things you should know. Buying investment property to rent out sounds simple enough. If you’re new to this, you’ll want to read more about investing in a rental property for beginners. There is most certainly a rental property investment strategy!
Buying an investment property before your first home is different from buying investment property with partners. You may also want to take a look at a “buying rental property calculator” so you can make a quality game plan.
We’ve got 10 things to consider before buying an investment property so let’s go ahead and break it down!
#1 – Are you ready to invest in real estate? What I’m specifically referring to here is your financials. Buying investment property to rent is not for those with little to nothing in the bank. You simply won’t be approved for a loan. Before you can invest in real estate, you need to have a budget and you need to have cash. You’ve likely heard a lot of people say you can get started with no money out of pocket. That’s just a marketing ploy people! Investing in real estate is not a get rich quick scheme. What it is, is an adventure. It’s an opportunity; a journey. It’s a passion that spans many, many years to become massively successful in real estate investing. And if you learn enough and take the time to do well, it’ll pay off. There are lots of resources for investing in rental properties for beginners!
#2 – Do you have a plan? You need a rental property investment strategy. Maybe even a “buying rental property calculator” to refer to. You should know what you want to invest in and how you’re going to get financing. There’s a real estate investing cycle you should be aware of – when to invest, pull out, etc. Investing in real estate is going to be a business and you should treat it as such. Start small, be patient; then you can grow. You will learn along the way. Obviously, you won’t do everything right in the beginning no matter how much you try. Yes, get as much education as you can beforehand but know that real world experience will make you successful.
#3 – It’s important to know what kind of property is best for you. We’re talking about residential, but there’s also commercial property, office space, land, industrial space, and lots of other options. You can choose to be an active or passive investor. A passive investor is one that helps finance would be investors (hence it being passive income). You collect on interest rates and maybe a percentage of the profits. Obviously to do this you have to have a pretty healthy income level. So, types of properties you can get involved in can be fixer uppers, rentals, buy low sell high, foreclosures, etc.
The type of property you invest in will determine how much work you’ll end up doing for your investment. I had a client wanting an investment property and they looked at this big home with a finished basement. They’d planned on getting something they could rent out. So now their decision was, rent out the top portion and… AirBNB the basement? Rent the basement to someone else not living in the main area? And then the driveway was just big enough for a tiny house unit so – should they build one? See how their initial thought of having an investment home turned in to a whole mess of other options? And it’s good to think of those types of things if you’re willing to back it up.
#4 – You should be aware of what’s going on in the neighborhood before you consider an investment property. What’s the planning, zoning, and nearby shopping in the area? The school districts should be good and the neighborhood should be somewhere you would want to live. Location makes a huge difference! You’ll also want to make sure the neighbors aren’t going to give you trouble. Last thing you need is a nosy, noisy, disagreeable person trying to run your renter out of town. Another thing about having a great neighborhood is that it’ll be easier to sell the property in the future. Buying an investment property to rent out means you may want to sell at some point.
#5 – Knowing local vacancy rates is going to be an important thing to consider when buying an investment property to rent. This is something most newbies don’t tend to think about. Investing in a rental property for beginners can be a lot of work so it’s important to hit these points. Vacancy rates will happen. You can’t keep your place rented out 100% of the time. Always have a plan and be realistic about it. You have to factor into your business plan how much it’s going to cost you while that property is vacant. This is a “loss prevention” type strategy that most businesses have. The moment you close on a property you’re on the hook for money every single day. If the vacancy rate in an area is high or increasing you will want to know why. Adjust accordingly.
#6 – The next one is scheduled maintenance of the property. There’s no big secret that every property needs to be maintained. There are things that you should do seasonally to make sure it’s in working order. Ensuring that your property is well maintained will help you avoid the headaches of massively expensive repairs in the future. A good rule of thumb when determining how much you should spend for expenses is known as a 50% rule. It says that, on average and over time… That expenses on a property will equal 50% of the income earned by that property. So if the property rents for $2,000 a month, then you can assume $1,000 a month in expenses before you pay the mortgage payment. And notice that I said before you pay the mortgage payment.
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#7 – How will you finance the property? If you’re a cash investor you won’t have to worry about financing. But let’s face it… Most people are not cash investors. So, when you’re getting financing you need to know how you’re going to get it. Also check out what type of loan products are available to you. This goes back to the third point; buying a house for you and renting out a space in it. Home loans for an owner-occupier is a lot less expensive to get. The interest rates are better and the down payment amounts are a lot less than buying an investment property. Buying an investment property before a first home can be tricky. Basically check with a loan officer about the investment products they have. Ask them what the down payment amounts are, interest rates, and plan out the financing side of this correctly.
#8 – Are you going to manage the property yourself or hire somebody? Well, that depends on how much time you have. Self-managing seems great but you have to know the reality of it. You have to be close by and able to commit some time to it. As a landlord you need to be able to accept calls and make decisions on a regular basis. As a property manager you need to expect more correspondences about the property. The availability to collect rent, schedule repairs, maintenance, and oversee that it’s being done properly is critical. If you can’t commit, hiring a property manager is for you. Choose a company with a good reputation, a single person, or even a renter! A renter would be the least costly option because they live there anyway. Spending a small percentage on a manager could be very worth it to you.
#9 – If you can be your own bookkeeper it will really help you out! Otherwise you’ll have to hire an accountant. Since you’re in business now, you’ll need someone to record the business transactions. It may be easier to hire someone if you have multiple properties. With just one property you can easily do it yourself if you stay on top of it. This involves keeping track of expenses and payments on the property. That’s the amount you pay in a mortgage and how much your renters pay you. All this can be given to your tax attorney at the end of the year to determine write-offs and whatnot.
#10 – Lastly, you’ll need an exit strategy. If you want out, for whatever reason, how can you get out and feel okay about it. You could want to get out because you’re overwhelmed. Maybe something happened in your personal life and you need less to think about. Or perhaps it just doesn’t end up being something you want to do after all. Usually people say they just sell if they want to stop. Well, what if you can’t sell? If the neighborhood goes to the dogs or the market is bad… Can you hold on to this property for six months or a year? Overall you want your investment to give you money back. So think about the end in the beginning and get prepared for anything!
USDRE Guide to Buying a Home
USDRE Guide to Selling a Home
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