Want to know what isn’t a secret anymore? Investing in real estate rental properties is an excellent source of passive income. You’ll earn steady cash whether you invest in simple single-family homes or the more complex multi-family apartments.
Management of both rental types is also easy. However, your rental may only be profitable if you take the appropriate steps in its acquisition. Splurging on a rental without due process will only result in significant financial loss. To help you, this lesson highlights the necessary steps to buying a rental property as a starter. Let’s look at how to fulfill the long line of requirements associated with the process.
Six Steps to Buying Your First Rental Asset
- Sort Out Your End Goal
Defining your objective before your purchase provides complete insight into the choices you’ll have to make along the line. These choices include single- or multi-family homes, condos or apartments, residential or commercial assets, and self- or third-party management.
Your end goal should be realistic. Define it according to your financial plan and the questions below:
- When’s your retirement target?
- Do you have current income sources aimed at retirement?
- How much cash do you have to invest in rentals?
- How quickly do you want returns on the property?
- Would you prefer to reduce risk or tax?
Diversifying your portfolio achieves the first and vice versa. Consulting experienced investors in this field may be a wise move here. Consider meeting other landlords, listening to podcasts, and reading useful blogs.
- Select Your Location
The location of a rental — or any real estate property — significantly influences its returns. A magnificent property in a poor area will not attract many renters. Conversely, an average asset in an excellent location tends to sell out quickly. Look up apartments in those areas to see what your competitors have invested in and get some ideas from them.
Vital indicators to consider when selecting your location include:
- Predominant Real Estate Market Type
Various locations support a specific real estate type the best. A place like the Great Smoky Mountains is excellent for vacation rentals and condos but, perhaps, not multi-family apartments. Make a shortlist of locations that best support the rental type you’re investing in at this point.
- Employment Opportunities
Job growth goes in hand with a solid rental market. Neighborhoods with plenty of job opportunities make excellent places to secure a rental.
- Security
Locations facing insecurity hardly do well in the market. People are scarcely willing to live in a place where they aren’t sure of their safety. Crime rate is a metric to consider for this purpose.
- Median Prices
You’ll have to consider the median prices of properties in the locations you’ve listed. Suppose you have some states that meet other requirements above. Comparing the prices gives you a clearer picture of selecting one since you’ll be considering your pocket too.
- Figure Out Your Financing Approach
Want to know a typical (yet absurd) mistake people make during the steps to buying a rental property? They contact a realtor before they sort out their finances. Consequently, such persons often let their ideal investment property slip through their fingers.
To avoid this porthole, consider any of these four options below:
- Cash-out Refinance
This method requires refinancing a larger mortgage than your current one. You may then have the difference between both as your down payment.
- Reverse Mortgage
A reverse mortgage is advisable for 62-year-olds and above. It’s an option that offers you a total loan to acquire the asset and doesn’t seek repayments until you sell the property.
- Home Equity Credit Lines
This alternative is available if you’ve obtained enough equity on your current asset. It offers you an unchanged rate on your pre-existing mortgage while you apply for another. This option may be unavailable if you’re buying an investment property before first home.
- Traditional Financing
Most people interested in rentals take this technique. Tradition financing gives you a loan in return for monthly installments over 15 to 30 years. You’ll have to make a 20 to 30 percent down payment if the bank approves your application.
- Find a Realtor in Your Selected Location
Finding a good real estate agent in your ideal location all but completes the steps to buying a rental property. A qualified realtor takes the whole stress off your hands and guarantees you the best.
When selecting your realtor, pay attention to the years of experience they have in the market and the shape of their structure. An experienced real estate agent is thoroughly familiar with the neighborhood; therefore, they’re in the best position to help you find the ideal property.
Experts recommend that you find an agent who specializes in your preferred field. It’s best to settle for a realtor who deals only or majorly in short-term rentals. Such an agent will offer you deals that an all-inclusive agent will hardly have.
You may find your ideal assets simply by browsing the pages of your realtor or consulting them for expert advice on the perfect property type. The former involves making your choice and doing your calculations; the latter requires telling them about your end goal and other valuable information. Whichever end of the spectrum you fall in, rest assured a capable rental realtor is your best shot.
- Run Your Numbers
Typically, the numbers include both the possible expenses and revenue from the properties on your shortlist. The former refers to taxes, unexpected repairs, and other costs, while the other is the profit you may generate. However, securing a qualified realtor saves you the stress of bothering with the expenses, as they already estimate the expected amount.
On the other hand, you’ll have to review the market again to determine the median rent for properties like yours in the neighborhood. Find out what others are paying for each of the assets on your list in that location. Then, compare the amounts with the costs of each property to know which is preferable.
- Close the Deal
Suppose you’re okay with the numbers you’ve run, and the property looks capable of generating sufficient rent. It’s time to close your deal with the realtor. This final part of the steps to buying a rental property requires you to be thorough with the agreement deed.
Is the property as described in the ads? You may go for an inspection of the property beforehand to see things better. You can use this opportunity to meet other landlords in the neighborhood to get their opinions.
Should the property satisfy you after this diligence, pay up and secure the apartment. You may decide to run by the agreement with a solicitor before concluding the position.
Conclusion
Buying an investment property to rent is an excellent move, provided they meet market specifications. Fortunately, you can buy the ideal rental by having a clear idea of your objective and finances, finding a suitable location, and doing due diligence with your realtor. Kindly keep the above recommendations to achieve a smooth rental property acquisition even as a beginner.