Are you looking to invest in a rental property? Buying a rental property is a nice way of generating passive income with less time and effort.
But, before becoming a professional real estate investor, you should begin with the basics.
You will have to consider many things when purchasing rental properties, especially in the current real estate market.
Since investing in rental property is a risky endeavor, it is vital to consider all the available options. Learn everything from home maintenance to tenant laws.
Keep reading this comprehensive guide to learn about buying a rental property as a first-time investor.
Decide Whether You Are Landlord Material
Being a landlord is the hardest part of owning a rental property. Though the property is a passive investment, it does not mean you will passively manage the property.
A landlord needs the time and required skills to manage your rental property. How handy are you at repairing drywall? Do you know how to use a toolbox?
True, you can hire someone for some specific property repairs. But, for some small stuff, it is not advisable for first-time investors since it eats into the profits.
Also, you can acquire property management services. Hiring the services of rental property managers is a good thing for first-time investors.
Managers will do much of the work. They will take maintenance calls, set rental rates, and hold interviews. They will also do background checks on potential tenants to sign the lease and pay rent on time.
If, however, you don’t want to hire rental property managers, consider speaking to one to get tips on managing a property yourself.
Assemble Your Team
As a first-time property investor, surround yourself with a quality group of experts. Start with your local real estate agent with extensive experience in the market.
To put it blandly, the process of purchasing rental properties is different from buying a primary home. So, whoever you choose should know what they are doing.
Have an expert real estate attorney, home inspector, insurance agent, and appraiser. The real estate agent is a good source of the other professionals.
Your team will help you answer questions like after-repair value (ARV) and rent-ready repairs. They will also help review restrictions like hold time before renting and short-term lease allowable.
Having real estate professionals in your team will save you money and headaches over the long term.
Decide What and Where to Buy
It’s a smart idea to state your investment goals before beginning your search. Do you need a single-family home or a multi-residential? Or do you want a low-maintenance condo?
You will get more cash flow from a multi-residential property. But, single-family properties usually have a higher potential for equity appreciation. That is so in hot real estate markets.
Consider narrowing down a price point. Expect to need a minimum of 20% down for the investment mortgage. But, 25% down payments are often common.
If you plan on financing your investment, use that figure to set your budget. Note that you need to pay closing costs, and lenders expect you to already have in reserve a minimum of six months’ worth of payment.
The location of the property is vital. You can focus the search on specific neighborhoods or be flexible in your search.
Decide the amount of effort you want to put into the property. You can find good value in a property that requires some repairs, but you will have to put in more work. You may prefer rent-ready properties instead.
Securing Financing for the Property
Skip this section if you plan on paying cash for the property. Otherwise, you need to figure out where you will get the money.
Financing a rental property isn’t the same as financing a residential home. You must have excellent qualifications. Lenders consider investment property mortgages as higher risks over owner-occupied property loans.
With this in mind, you have a few options for property financing. Whichever you choose, it is advisable to get a preapproval for a loan or secure a financing source before.
Here are two options you can have before starting the search:
Conventional Financing
The term refers to a mortgage you get from the bank due to your qualifications. It is a confirming loan that meets the lenders’ standards.
Their requirements depend on credit score, property type, employment, debts, and assets.
Even though you can use the property’s expected income to qualify for the financing, lenders will often look at your current income.
Do you have other debts or mortgages which consume a large amount of your income? You will find it hard or impossible to get conventional financing.
But, if you can qualify for the loan, it is the most cost-effective direction to go. Interest rates are usually higher than private home loans, but they are cheaper than the other options.
Asset-Based Loans
Consider an asset-based loan for long-term financing for a rental property. The underlying asset is the primary basis for qualifying for the loan, not your qualifications.
The lender will still have to confirm your credit score to determine your eligibility and interest rate. But, they will not use income, personal debts, and employment situation.
The main condition for the loan approval is that the asset generates enough cash flow that covers the mortgage payments. The lender will use the debt service coverage ratio (DSCR).
Do Your Research
Never listen to the numbers most brokers give you. Do your due diligence. Research everything there is and do the math yourself.
Researching is your get-out-of-jail-free card, so take your time and turn every stone on the property. If you miss anything in the research period, it is your fault.
Consider Buying a Rental Property
Before laying down your money, understand everything about buying a rental property. The investment requires a lot of work to maintain cash flow.
Need help in managing your rental property? At Reedy & Company, we are a leading property management company.
We manage over 3,500 local, domestic, and foreign investors’ properties. We will also provide you with advice in the real estate market.
Contact us now to learn about our property management services.
