With numerous options available, it takes effort to determine the most suitable one for you. Due to the increase in mortgage rates, the housing market is becoming less attractive. To simplify, owning rental property is like running a small business as it involves investing in a property, renovating it, managing tenants, complying with regulations, and taking care of finances.
Although the IRS categorizes rent payments as passive income, the process of owning a rental property involves various activities, such as preparing, purchasing, repairing, and maintaining the property. If you’re interested in buying your first rental property, there are several factors you should consider.
All About Financing
The most challenging and rewarding aspect of the process is understanding the financial aspect.
Assessing your finances may not be enjoyable, but envisioning increased income’s potential benefits can be enjoyable.
Don’t Go It Alone
Try consulting with specialized local real estate agents who deal in investment properties. They will provide insight into the rental market and help you determine a suitable rental price for your property.
It would be best if you do not hesitate to ask your friends for advice. Identify any friends who own investment property, as they can provide valuable assistance in avoiding common investment mistakes as well as those that are uncommon.
Also, involve your financial planner in the conversation. These professionals can help you determine the potential return on investment (ROI) and whether it justifies buying.
Factors to Consider
If you’re planning to purchase a rental property, take the following factors into consideration:
Do you need a mortgage to buy a property? The most significant financial consideration for most people is the mortgage, but there are other considerations as well. Additionally, lenders may require a down payment of 15-25%.
How’s your credit score? The credit score requirement of non-owner occupied properties is typically 620 or higher, which also contributes to the process.
How much can you afford to borrow? Zillow has a basic mortgage calculator, and when using it, please consider all the costs involved in owning an investment property and provide unbiased information.
What’s the cost of doing business? In to the initial expenses of the down payment and mortgage, it’s important to consider ongoing costs such as taxes, insurance, and repairs. Budgeting for periods when the rental property may not be occupied is also crucial. A standard guideline is to set aside 1% of the property’s value for maintenance and repairs.
Lean Into Help for the First Time Buyer
If you’re overwhelmed, know you don’t have to do everything alone. Consider reaching out to your mortgage broker who helped you buy your home to see if they also offer services for investment properties. They can provide valuable guidance and support as you make important decisions.
Using an experienced investment property realtor can make the process of buying commercial or investment property smoother. They can provide you with a reasonably optimistic yet accurate estimate of the costs involved in your business venture and guide you through the advantages and disadvantages of various locations and properties.
Finding the Property
After clearly understanding your financial situation, it’s time to move on to the exciting part. If you haven’t already done so, look for a real estate agent with expertise in dealing with investment properties. You may have already spoken with friends who own a rental property, so you can ask them for any referrals they may have.
What Make a Good Agent?
To ensure broad experience in your search for rental properties, speaking with real estate agents who specialize in different areas is essential. During the conversation, ask for specific examples of rental property sales they have completed and their knowledge of the local area. Determine if they specialize in a certain part of town or specific types of properties so that you can ensure their experience expands your search rather than limits it.
ActiveRain is a social media site exclusively for real estate agents. You can find plenty of valuable information in the posts, making it a potentially useful resource.
If you’re looking for a reliable agent, they should be able to provide insights on who is renting properties in various locations and how long they tend to stay. In addition, they should be able to evaluate the potential resale value of properties and areas accurately.
It would be great if the agent could inform me about properties not currently available on the market. Additionally, I am interested in knowing whether the real estate agent owns or manages any investment properties.
Regarding commission, the agent typically receives their commission from the sale price. Both the listing and buying agents may divide the total commission. The sale price would already take this deduction into account.
Use Tools to Help Find Properties
You may already be aware that numerous apps and websites are available to help you find properties. Some well-known examples include Zillow, Trulia, Realtor.com, and FBSO.com, all of which list investment properties.
Certain websites focus on investment properties. These include Mashvisor, Roofstock, and Realtytrac, which have listings for foreclosed, off-market, and regular properties. NeighborhoodScout analyzes different areas, which can help to refine or expand the search.
Should You Look at Foreclosures?
When searching for properties, it’s important to consider whether looking at foreclosed homes is a good idea. However, it’s important to note that buying a foreclosed property has both advantages and disadvantages. On the positive side, foreclosed homes are often sold below their market value, resulting in a better return on investment and potentially more accessible financing.
Buying foreclosed properties can have drawbacks that mainly pertain to the amount of time it takes. This is because the sellers of such properties are not always required to disclose information to the same extent as in regular real estate sales. Investing time in conducting due diligence by researching the property’s condition, history, and ownership is necessary. The overall process may take longer, and it is likely that the property will require significant repairs.
After the Deal
After your offer has been accepted and while your agent is doing their part, it’s important for you also to complete some tasks. You should review the state and federal laws that apply to rental properties. It is a good idea to consider obtaining landlord insurance. Additionally, it would be best if you started preparing to assemble the necessary contractors to work on the property. This will enable you to minimize the time the property stays vacant once the deal closes.
You need to choose whether to look for tenants by yourself or hire a property management company. Several property management companies provide various services. Determine the specific contracts, background checks, and vendors you prefer. Don’t forget to inform your acquaintances that you have a property to rent!
Now You’re a Landlord
Congratulations! You have made the most difficult decisions, but there may still be a few more to make.
If you choose to manage your property, there are various types of property management software you can use for free. Introducing yourself to your new neighbors and working on your investment while maintaining accurate records is a good idea. Additionally, don’t hesitate to ask for help if you ever need assistance.