Buying a Rental Property? 8 Important Things You Need to Consider First
Over 10 million Americans earn income from their rental properties, which shows a lucrative venture for second homeowners.
Buying a rental home lets, you climb the property ladder, make a life-long investment, and generate a passive income for you and your family. Perhaps you’ve dreamt about owning a rental property, but you’re not sure how to bring this to fruition.
Sounds like you? Don’t worry; you’ve come to the right place. Here is what to know before buying a rental property.
1. Weigh the Risks With the Rewards
Before compiling a list of questions to ask before buying a rental property, decide whether becoming a landlord is worth the risk. The most obvious reward is that you enjoy a passive income, your real estate value will increase, and the interest you pay on a tax property loan is tax-deductible.
Then, pit this against the potential risks. For instance, your rental income may not cover the mortgage payment, or there may be another event like the COVID-19 pandemic where landlords couldn’t collect rent from tenants.
2. Location, Location, Location
One of the most important things to consider before buying a rental property is the location. Although it sounds like a cliche, most tenants want to be near their workplace and the city center, with plenty of amenities. You should also note down whether it’s near any schools, grocery stores, and hospitals to keep prospects notified.
But you’ll likely pay premium prices for a property rental in the center, so make sure you can realistically afford it. Further, consider buying a home that has outdoor space, whether it’s a small yard or a deck, as many tenants want somewhere, they can entertain guests privately.
Once you’ve found the property of your dreams, then learn more about rental loans so you can sort out the finances ASAP.
3. Secure a Down Payment
Every rental property investment strategy includes securing a down payment.
Unlike most houses, you’ll need a 20% down payment because mortgage insurance doesn’t cover investment properties, so make sure you have enough funds. Again, factor in any potential repairs or expenses needed to renovate the property to guarantee you have enough for the down payment.
Although it sounds obvious, take care of any debts you may have. This may include outstanding medical bills, student loans, and credit card debt.
4. Choose a Low-Cost Home As Your First Property
Not sure how to buy a rental property? Then, find a low-cost home to get you on the property ladder.
As a general rule, don’t buy a home that costs over $150,000 because you want to keep your investment as low as possible. This is because if you don’t reach your target profits, then you haven’t lost as much.
5. Income Potential
Before buying a rental property, you must consider its income potential. This stage is crucial because you don’t want to spend thousands on a property, only to become a financial detriment.
A great way to determine this is by using the 1% rule. This states that the monthly income you receive from tenants should be at least 1% of the property value. For instance, if you bought the property for $150,000, then get at least $1,500 per month in income.
6. Screen Tenants Properly
You’ve got the property rental-ready, so now is the exciting part: finding your tenants.
Start by figuring out who your ideal tenant is. Although students are guaranteed in university towns, they will want somewhere already furnished and a smaller space because it’s cheaper.
In contrast, families will have their belongings and may want specific amenities. Plus, they will want a premium-quality home because they’ll likely stay in one place for several years.
Your ideal tenant will also depend on how much you’re willing to spend. For instance, if you have a more expensive home in a great neighborhood, families are your best bet. But if you have a smaller property, then advertise your property towards students or single tenants instead.
Whoever you choose, you must have a robust screening system. Make sure you verify the candidate’s income, previous addresses and run a criminal background check. You should also check whether they have been evicted before to give you peace of mind.
7. How You’ll Manage the Property
In an ideal world, the tenants will simply wire the rent to your bank account, and there’ll be no issues. But, there will be times when there’ll be a plumbing disaster or a broken window you must take care of.
To avoid any hiccups, decide ahead of time whether you’ll deal with these issues or if a property manager is a better option. A great way to offset any financial problems is by having at least two month’s worth of rental expenses, so you’re not affected by a costly repair.
8. Invest in Landlord Insurance
Many rental property owners overlook the importance of getting landlord insurance. Aside from a regular homeowners package, landlord insurance covers any damage, lost rental income and offers liability protection.
And to get the perfect price, find a bundle that combines the two.
What to Know Before Buying a Rental Property
Hopefully, this article has told you what to know before buying a rental property.
Start by weighing the pros and cons, find a low-cost home in a great location, and save up for a down payment. Then, figure out how you’ll manage the property and screen tenants until you’re happy with the decision. Good luck!
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