Buying rental property has proven to be a valuable real estate investment vehicle. Few exit strategies, for that matter, are currently in a better position to build wealth for their investors than buy and hold assets. Nonetheless, a profitable rental portfolio isn’t going to build itself; you’re going to need to put in the work, and it all starts with buying your first rental property.
Buying your first rental property is a huge commitment, but I can assure you there’s more than one step to make sure things go according to plan; there are actually several, not the least of which are integral to your success. Here’s a list of the steps you should take if you want to buy a rental property:
While far from revolutionary, anyone intent on buying rental property can’t underestimate the importance of your own due diligence. The first step for anyone looking to buy and hold is, therefore, to do your own homework, analyze the appropriate data points, and align them each with your own goals. If for nothing else, it’s not enough to simply familiarize yourself with key performance indicators, but you need to make sure they will help you realize the goals you set for yourself.
Prior to doing anything else, come up with your own goals. What kind of investment property do you want? How long do you intend to rent the house out? What market should you invest in? How much cash flow will it take to meet your investment goals? Perhaps even more importantly, what exactly do you want from your investment property? Ask yourself the tough questions to get a good feel for what it is you hope to accomplish. Only once you know what you want out of an investment property will you know what to look for.
Next, you’ll want to secure financing. Do not make the mistake of getting ahead of yourself by looking at properties before you know what you can afford. Relatively early in the buy and hold process, secure financing; that way, you’ll neither waste your time looking at properties out of your price range or be second in line when it comes time to make an offer. Having capital will give you an idea of the houses you can look at and allow you yo act fast in the event an opportunity presents itself.
If you are going the traditional route, understand that lenders are more strict with their underwriting on rental properties than personal residences. When evaluating your loan application, the bank will look at several components, including your income, current debts and credit history, assets and available funds, and the property itself. They will also carefully scrutinize your debt coverage ratio, break even ratio and operating expenses ratio. Case in point: it’ll be harder to receive a traditional loan for a rental property than for a primary residence, so be prepared.
Having already identified what you want out of a rental property and how much money you have to spend, start doing your homework. A great place to start are the four profit mechanisms investor’s covet the most: cash flow, appreciation, loan amortization and tax benefits. Each property’s potential in these four areas should be evaluated prior to purchase and the results should then be integrated into your investment strategy.
To accurately assess whether or not buying a rental property is right for you, gather as much information on the home as possible. Obviously, the price point is of the utmost importance, but it’s far from the only thing. In addition to how much the home costs, you will need to look at important indicators like rental rates, vacancy rates, miscellaneous costs, market performance, and a lot of others. Each piece of information collected will bring you one step closer to your ultimate goal: buying a rental property. Ultimately, you will want to know everything about the home and its potential before moving forward to the next step.
Here are some of the best places to gather the necessary information:
Once you are confident in the information you have collected, compare and contrast it to your own goals. The idea here is to determine whether or not the property can actually help you meet your own goals. Remember, there’s no reason to acquire a property that won’t help you meet the goals you have set for yourself.
The next step is to pick the house that works best for you. Find a home that fits within the parameters you have set, and proceed to make an offer. After the purchase, there’s still one important step: property management. Closing the deal doesn’t mean you are done; you should look into hiring a property manager. Someone that can help you run your new rental property will prove invaluable, and is well worth their cost. So once you have a property, get someone to manage it for you; it’s the only way to make your investment truly passive.
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There is no universal “buying a rental property calculator,” as each investment property is unique to the individual investor’s circumstances. There isn’t a single equation that can account for everything you should look for when buying investment rental property, but I digress. SparkRental’s “buying a rental property calculator” should serve as a good starting point. While not entirely comprehensive, it should give investors a good idea of what they can expect by simply plugging in a few numbers.
I want to make it abundantly clear: there are countless things a potential investor should look for when buying a rental property. Perhaps even more importantly, the variables one must take into consideration are dependent on outside factors. Simply put, there are a lot of things to keep in mind, and each of them is just as important as the last. However, when all is said and done, there are four indicators to pay close attention to:
Again, these aren’t the only factors to consider, but you can argue they are the most important to investors.
Here are a few of my favorite tips for new rental property investors:
Buying rental property can be a great move, especially in today’s high rate environment. Most real estate investors have found a quality rental portfolio to be the best way to build wealth and supplement their golden years. One thing is for certain, however, said benefits will never come to fruition if you don’t buy your first rental property. Buying your first rental property is nothing, if not the firs step in what may turn out to be a lucrative career path.