Real estate is one of the most popular investments, and for good reason. It's safe, it's profitable, and it can last you a lifetime. No wonder there are over 8 million independent landlords across the US!
Well, there's a right way and a wrong way when shopping for real estate, but it doesn't have to be too hard to get it right! Buying a rental property is one of the biggest financial decisions you'll make, so let's talk about how to do it right.
#1. Shop Around
There's no sense in settling for the first or second property that's available to you just because you don't see anything else. If you have the money for it now, you can have the money for it in a couple of months.
You want to find the best price for the best product, and don't neglect the numbers. Are there tenants already leased in one? What's the rent-mortgage ratio? Do you want to spend a little less on a two-unit building or stretch a little for a three-unit? These are important questions to ask.
Not only that, you'll want to shop around for your loan. Try to get preapproved so you know your buying power ahead of time and you can let sellers know you're serious. Just remember, the difference between a 3% and 4% interest rate on a $300,000 house is $3,000. Would you throw $3,000 down the drain? If not, shop around.
#2. Pick The Right Neighborhood
One of the most important parts of choosing a rental property is the location. The easiest way to lose money in this industry is a neighborhood going downhill. Insurance will cover fire, but not that.
The best way to avoid this is to look for a secure neighborhood with the right amenities that appear to be permanent. What do we mean by that? Well, a restaurant or bar could be gone next month for all you know. However, if your building is within walking distance from a school, public transportation line, downtown, a public park, or something similar, that's your best bet.
#3. Inspect Your Rental Property
This is a no-brainer, but it has to be said. Don't neglect the inspection, and really take everything into account before making a purchase. You're buying this property to make money, not drain it, so be looking for the bigger fixes.
An old water heater could run you half of the rent you collect in a month, so that's not a deal-breaker. Some weeds growing through a patio could be managed, same with a tree that needs to be knocked down. If you think you can get the necessary work done yourself, or for less than a few thousand dollars, don't worry about it. Rental properties are a marathon, not a sprint.
However, if the roof is at risk of caving in, there's mold or asbestos in the walls, or there's structural damage, simply walk away. Nobody wants to spend $15,000 in their first year before making any profits and after dropping their downpayment.
#4. Do The Math
We mentioned the rent-mortgage ratio, and that's very important. If you're putting $100,000 down on a $400,000 property with a 3% interest rate, you'll be looking at payments of over $1,250 a month (with a 30-year fixed rate). Use a mortgage calculator to scale it to your price range. In certain states, you could be paying well over $5,000 in property taxes, too.
That alone is $20,000 in annual expenses, not to mention if something goes wrong with the property or if you can't find tenants. If you're paying for snow removal services, plumbing a few times, and other services, that could be a lot more. Of course, once the mortgage is paid off, you're looking at a lot more income. However, 30 years is a long time.
Make it make sense. If that is a 3-unit building, you should be charging a minimum of $1,200 per unit, leaving you with a potential for close to $20,000 in profit. Make sure that whatever property you're buying is worth that rent price.
If you find things wrong with the property, if the property doesn't have tenants, or if you're skeptical of the price for any reason, use it to your advantage. Negotiating the price could be the most profitable 20 minutes of your life you've ever spent. If you're able to knock a little off the price tag, you'll save on your mortgage payments and get the most out of your investment.
#6. Hire A Property Manager
Let's face it, you want the rental property because you know that it's safer than the stock market, but you still want the same passive income you'd get from dividends. Well, you can have that passive income with the right property management services.
The average landlord puts in hours of work into their property every month, leaving them tied to that location. Essentially, you're buying a job and one that doesn't even guarantee income.
Well, if you have the right tenant-screening, maintenance, and management services, you can just sit back and know your investment is in good hands! The best part is, the right services will only take a small portion of your rent while taking everything off your back! Not only that, they'll even be able to keep up with inflation, the local market, and more in order to maximize your income and even save you money.
Start Your Search
When you're looking for a rental property, it's great to start a search online and shop around, but you should be as diligent as possible. It's a huge financial decision that will impact the rest of your life. Make sure you have the right property, the right tenants, and the right management team. Stay up to date with our latest news and give us a shout for any help you need!