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Real estate investing is one of the most popular ways to build wealth. But did you know that it can be a great way to buy your first house? Here are some tips from professional realtors on how they like their clients to purchase their first rental property, and why being an investor might actually provide more benefits than downsides when buying your home.
Purchasing a rental property is a substantial investment that may pay off handsomely. Take it from the experts, though: you’ll need to take certain measures. Do your homework, take your time, and read the advice we’ve compiled from real estate experts throughout the country on how to acquire your first rental property.
Here are 31 expert pieces of advice for purchasing your first rental property.
1. Purchase the property with the help of a loan.
Professor of Law at Brooklyn Law School, David Reiss
The mortgage market is something that potential real estate investors should be aware of. If you secure a suitable mortgage, you’ll be able to keep your expenses low and lessen your anxiety regarding the cash flow of the home. Using the leverage of a mortgage will allow you to preserve part of your money for repairs or future investments. A mortgage, on the other hand, maybe a double-edged sword since it comes with financing expenses, therefore it’s always better to get expert advice.
2. Invest in ready-to-move-in real estate
The Close’s Christopher Linsell is a staff writer and real estate coach.
When searching for the ideal rental property to buy, investors are faced with the traditional problem of whether to buy a property that requires a lot of work but has a higher rate of return or a turnkey property that has all the cashflow systems in place but has a lower rate of return. You already have a wonderful property, a property manager, and tenants lined up with a turnkey rental property. Roofstock can help you locate a turnkey property if you don’t know where to look. You may explore properties in up to 40 different rental markets at a variety of price ranges and invest in the rental that is appropriate for you.
3. Get your financing in place as soon as possible.
FitSmallBusiness Divisional Managing Editor Michael Cetera
If you’re going to purchase your first rental property with a mortgage, you should carefully consider all of your financing alternatives. Should you get a 15-year or 30-year loan? Is it better to have a fixed rate or an adjustable rate? To get a better idea of the real cost of your financing alternatives, first-time investors may use LendingTree to fill out a simple form and have different lenders compete for your loan. Its online marketplace allows you to easily compare prices and offers to locate the best deal.
4. Prioritize single-family homes for investment.
Kathy Fettke, President and CEO of Real Wealth Network
Investing in single-family homes is the most straightforward method to get started as a beginner real estate investor. It is less difficult to maintain than multifamily or commercial buildings. There is less wear and tear on the property when there is just one renter, and you will only have to replace one item if anything breaks.
5. Make Enough Investments to Become Cash Flow Positive
Richard Haynes, Broker & Owner, Manhattan Pacific Realty
Only acquire a cash-flowing rental property if you’re a first-time landlord. Making sure you put in enough money to be cash flow positive is the greatest method to reduce your risk and maximize your chances of success. There will be unanticipated costs, so budget for them. It also allows you to withstand economic downturns. If the property generates cash flow, market swings are less important, and you may own it for a long time.
6. Pay attention to your return on investment.
Iris Felder, Luxury Sales & Rental Expert, The Capone For Your Home Team
Invest in a field with a high rate of return on investment. It’s preferable to have a cap rate of at least 7%. In transitional or gentrified regions, you may discover some fantastic offers. You’ll need to know the location and what properties are selling for in the area to get the best return on investment.
7. Understand Your Marketing Plan
Upkeep Media co-founder Stephen Fox
It’s critical to locate suitable renters as soon as possible if you’re investing in a rental property that’s presently unoccupied. Before you buy a rental property, make sure you have a marketing strategy in place. An empty rental property may deplete your cash flow rapidly. Major internet real estate platforms will be the greatest sites to offer your rental property.
8. Purchase what you are familiar with
AE Home Group Co-Founder Jeff Miller
Invest in a rental property in a neighborhood or specialty that you are acquainted with. To get a competitive edge, draw on your prior life experiences. If you’re retired military, for example, invest in a rental home near a local military installation to facilitate military transfers. If you’re a college graduate, invest in a student rental near your alma mater. If you’re a nurse, invest in a short-term nurse rental property near your hospital.
9. Make sure you have a written lease in place.
Jessica Dolan, Home Organizer & Stager, Room to Breathe
Have a very clear lease in place with all the facts written down so that the tenant’s expectations are apparent. The lease should include when payments are due, the lease termination costs, and whether or not pets are permitted. The lease should also specify what cleaning the renter is responsible for and whether or not the heat should be set to a certain setting throughout the winter.
10. Thoroughly screen prospective tenants
Tricia Tetreault, FitSmallBusiness Small Business Finance Staff Writer
It’s critical to properly—and thoroughly—screen prospective renters if you want your first rental property to be a success. MyRental, for example, provides a free online application for renters and a monthly membership for landlords to check prior locations, criminal histories, and eviction records. There’s no justification for not thoroughly investigating potential renters before renting to them with tools like these. This easy procedure might help you avoid renting your property to someone with a bad reputation.
11. Speak with Your Neighbors
Don Tepper, Investor & Real Estate Agent, Solutions 3D
Knock on the doors of your neighbors and introduce yourself. Explain that you’re thinking about purchasing the house and want to know whether they’ve had any issues with the renters or the owner. While you’re there, take a drive about the neighborhood and look at the property throughout the day, weekend, and evening to get a sense of the area.
12. Collaborate with a property management firm
Keller Williams’ Katie Messenger is a real estate agent.
Consider how much time you have. Do you have the time or inclination to respond to calls for a broken furnace at 2 a.m.? If the answer is no, you may want to hire a property manager. As a real estate agent, you’ll want to interview several firms to see whether their services and rates are worth the time and effort of not having to do background checks, accept maintenance calls, or interview renters yourself.
13. Invest in a home with a backyard.
Accelerate Homes co-founder Tom Davies
A large number of potential tenants desire a comfortable space where they can entertain guests or rest on their own. Most renters aren’t particular about the sort of outdoor space they desire, but they do want it to be private, useful, and something they can personalize with plants, furniture, and decorative lighting.
14. Invest in a multifamily property where you can live.
Growella’s Founder, Dan Green
An FHA mortgage offers the optimum mix of interest rate and down payment amount for investors wanting to reside in their multifamily investment property. Federal Housing Administration (FHA) mortgage rates for two- to four-unit houses are about one percentage point cheaper than equivalent conventional rates, and the minimum down payment for the FHA is just 3.5 percent, compared to 25 percent or more for conventional loans.
15. Accept Rent Payments Via the Internet
Dennis Shirshikov, FitSmallBusiness Small Business Finance Staff Writer
Landlords with a lot of experience have heard a lot of different—and sometimes quite creative—stories about how a tenant’s rent payment was late. You may set up an online rent collection to help avoid cheques being lost in the mail, being devoured by wild dogs, or blowing out the vehicle window on the route to the mailbox. There are no more excuses for online payment. Your renters may pay you instantaneously and set up monthly automatic payments with the press of a button. Landlords may use online rent payment and comprehensive property management software from companies like Avail to help them promote their homes, screen tenants, arrange contracts, and schedule maintenance.
16. Purchase a vacation rental home.
Avalara MyLodgeTax General Manager Rob Stephens
Examine a possible vacation rental home and compare rental prices on sites such as HomeAway and VRBO. Real estate will appreciate in value over time in general, but specific markets will appreciate more than others. Examine the market’s performance in the past and look for areas of expansion that might lead to higher returns. Also, check to see whether the local zoning regulations and borders enable you to rent out your property to visitors.
17. Purchase a home in close proximity to apartment buildings.
J Scott Digital’s Founder, Jeff Rohde
Purchase in a region with a lot of apartment complexes. Renters are constantly seeking a place to rent that is a step above a regular apartment, therefore there is a demonstrated demand for rental properties in locations with apartment complexes. You’ll be able to match that demand and rent out your home without having to spend as much money on advertising.
18. Keep Your Risks in Check
HomeUnion’s Senior Communications Manager, Stacey Corso
While real estate prices vary, individuals still need a place to live during economic downturns, providing investors with a consistent source of revenue from rental properties. This is why astute investors recognize the importance of selecting the ideal passive rental property to mitigate risk. Even during downturns, seek places where rental demand will be strong.
19. Look for properties all throughout the country.
Nancy Brook, Broker & Investor, Billings Best Real Estate
Consider purchasing real estate in different locations of the nation. You may be able to locate a house that is both more inexpensive and offers a higher return on investment. You’ll need to locate a quality real estate agent and property manager in that market if you go this path.
20. Invest in real estate with your retirement funds
Melanie Patterson, FitSmallBusiness Real Estate Investing Staff Writer
Don’t restrict your investing selections in an IRA [individual retirement account] or a Solo 401(k) plan to only equities and bonds. To diversify your portfolio and invest in real estate, including purchasing your first rental property, open a self-directed retirement account with a provider like Rocket Dollar. This is a fantastic approach to take advantage of tax-deferred retirement money while being IRS-compliant and getting into real estate investment.
21. Comprehend the Rent Control Laws
Keller Williams’ Lisa Krause is a real estate agent.
Know the individual rental requirements in the municipality where you want to buy. The instructions show how to register the lawful rent amount and how to calculate the yearly rent increase you may pass on to the renter. You may be eligible for further rental increases such as vacancy decontrol or a one-time capital improvement allowance in certain circumstances. Knowing how much you can charge for rent in advance will help you calculate your return on investment.
22. Consult with other landlords
Platinum Home Mortgage’s Corey Vandenberg is a mortgage broker.
Finding and retaining excellent renters is a skill in and of itself. Join a local landlord organization or ask a landlord who has been in the business for a long for guidance on what to do and what to avoid. This kind of knowledge can aid you in avoiding problems that might damage your first experience. Being well-informed is the first step toward a happy rental experience.
23. Have you had any property inspections done?
Dean Myerow, Las Olas Wealth Management’s Bond Professional
If you’re purchasing in an area where radon gas has been known to rise from the foundation, have a professional do a radon gas test. If it’s an ancient home, you should also have a sonar scan of the earth outside done in case there’s an undiscovered oil tank hidden. If an immediate liability exists and is leaking, you don’t want to acquire it.
24. Purchase a Property That Is Ready to Rent
Seth Lejeune, Real Estate Agent.
Look for anything that is almost ready to rent. Getting into the investment sector doesn’t have to be difficult, but it may be if you purchase a property that has to be completely renovated. Find something turnkey that can cash flow right away if you don’t have any expertise upgrading residences. If you don’t, you can find yourself behind the eight ball when it comes to renting the home. Always keep in mind that the goal is to get the item to generate revenue.
25. Select a Location Close to Amenities
Alexandra Axsen, Owner & Managing Broker, Lake Okanagan Realty Ltd.
Choose a site that is convenient to public transportation and other facilities. Most students will rent for the four years they are in university, and their parents will often issue personal guarantees on the rent.
26. Select a Rental Property That Is Ideal for Your Ideal Tenant
Mark Painter, Founder & President, EverGuide Financial Group
Purchase a property and renovate it to appeal to the usual tenant in the region. Targeting the right tenant in your regions, such as students, young professionals, families, retirees, or tourists, can help you gain the best value. If you purchase a property that would be excellent for families in an area where students or young professionals mostly rent, there’s a strong chance you’re not getting the best price.
27. Conduct a Pro Forma Evaluation
RealtyHop’s Shane Lee is a data analyst.
Make a “pro forma” examination of the property you’re considering purchasing. Examine comparable homes in the same neighborhood, as well as how rentals have changed over the last decade and are expected to change over the future decade. You’ll have a better idea of how much net income the property will produce and how much you can earn if you sell it after you know the predicted rent increase and estimated operations and maintenance costs.
28. Be aware of economic cycles
Steve Pollack, CEO & Co-founder, Anchor Loans
Pay attention to economic cycles as you construct your investing strategy. The ideal time to purchase is during a recession, but it may also be the most dangerous since inflation and unemployment are often high, and rental demand falls. With all of those risk considerations in mind, now is also the most cost-effective time to buy. Vacancies diminish when the economy recovers, and rental prices begin to rise. The expansion and contraction phases are included in the peak phase. A rise in new projects, rising inflation, and rising interest rates are all key markers of the contraction period. Increased vacancy rates and a leveling down of prices are expected in several regions. Understanding these signs will assist you in determining how to use market timing to make the most profitable trades.
29. Be Aware of Rental Restrictions for Short-Term Stays
Roh Habibi, Founder & Principal, The Habibi Group
Many communities have enacted short-term rental regulations in response to the rise of short-term rental firms such as Airbnb and VRBO. Your condo association or homeowners’ association (HOA) may have its own rules and regulations, and short-term rentals of less than 30 days may be prohibited. Before you acquire a home, check for any rules and read your HOA agreement to be sure it may be utilized as a short-term rental.
30. Absorption Rate Factor
The Close’s Managing Editor, Emile L’Eplattenier
When purchasing in new areas, the absorption rate, which is a measure of how long it will take for all of the available houses or rentals in a certain area to sell or rent, is an essential factor to consider. If there is a surplus of available homes in a certain location, speak with your real estate agent about why so many other investors are selling at the same time or why transactions are taking so long to complete. Homes with absorption rates of 20% or higher are selling rapidly.
31. Are You Aware of Your Inherited Tenants?
Ryan Coon, Founder & CEO, Avail
If the property is already occupied when you buy it, be sure the renters are trustworthy. Request the tenant’s rental payment history, as well as the prior property owner’s background checks, credit checks, and rental applications.
Conclusion
When purchasing your first rental property, keep these 31 expert pieces of advice in mind. They may be able to assist you in avoiding expensive errors. Before making an offer, do your homework on the community you’re intending to purchase in and find out how much comparable houses have sold for.
