Tips for rental property buying
It is easy to see why rental properties have remained such a popular investment, even as the fortunes of the stock market have come and gone. Rental properties can provide a steady stream of income and excellent price appreciation over time, something few other investments can hope to match. There is a reason why so many fortunes have been made in real estate, and some of the richest people in the world got their start investing in real estate. If you are thinking about joining them, you could be making a very wise move. But before you jump in, there are some steps you need to take first. Here are some timely tips to help you buy your first rental property.
Treat your investment like what it is – a real business
It can be tempting to treat your first rental property as a sideline, or even an experiment, but it is actually a business. No matter how small your initial investment, it is important to treat your rental property like the business it is. That means setting up a separate bank account to collect your rents and pay your maintenance costs. It means registering your new real estate business, filing business taxes and making sure you have all the necessary licenses to own rental property and act as a landlord.
Consider your time commitment
Owning even a single apartment building could prove to be a significant investment of your time, so it is important to look at how much time you have to invest. If you have a busy job that keeps you on the road or in the office for 80 hours a week, you may not have time to unclog all those toilets and repair those broken steps. A lack of time does not mean you cannot be a landlord. It just means you need to work smarter instead of harder. When time is tight, hiring a property manager to collect the rents, make the repairs and take care of all the paperwork could make a lot of sense. You will likely pay the property manager about 5% – 10% of your rent roll, but that could be money well spent if time is at a premium.
Choose the right neighborhood
Now that you have addressed the business nature of your proposed rental property enterprise and assessed your time commitment, it is time to search for the perfect rental property. Unfortunately, there is no such thing as the perfect property, and the choice you make will depend on your budget, priorities and your own gut instinct. No matter what you do, you should fight the instinct to buy the cheapest home or apartment building you can find. What seems like a bargain going in could end up being a money pit, so look for properties located in good neighborhoods. If you are a dedicated carpenter and do-it-yourselfer, you might be able to make a fix-it-upper work for you. Just look for a property that needs some TLC, but make sure it is situated in an up-and-coming neighborhood. As property values rise, so will the return on your investment.
Get the expert guidance you need
Buying a rental property is not the same as buying a home, and the purchase will require a different type of expertise. Many first-time buyers choose the wrong real estate agent, only to find out later, they lack the credentials needed to assess this type of investment. Make sure the real estate agent you are working with is familiar with the specific needs of what you are looking for and that they understand terms like rent roll and return on an investment. An experienced real estate agent will be able to help you assess the current income from each property so you can make an intelligent and informed decision.
Start small and build your empire
It is tempting to go full force when buying a rental property, but it is best to start small and let your initial tenants finance your future empire. You can use the excess cash flow from the first property to build cash for the next purchase. Once you gain some experience and know what you are doing, you can start to build your list of properties, one home and apartment building at a time. Starting small also reduces your risk, something that is very important in real estate investing. You never know when the next market crash will send the value of your current properties plummeting, and being highly leveraged could spell disaster. If you finance your future growth with cash flow from your existing properties, you can avoid these issues and start building real wealth for the future.
Evaluate your properties based on ROI
Return on investment (ROI) is an important concept for any business owner, and it is just as critical when that business is real estate. No matter how great a particular property looks, it is important to make your evaluations on an investment return basis. That means looking at the amount of rent the property is bringing in, the carrying costs of the property, the real estate taxes, the anticipated repair costs and so on. If the rental property is bringing in a solid return and has a strong appreciation potential, it is clearly a winner. It is important to maintain this same discipline as you grow your real estate empire. It does not matter if you own one rental property or a hundred; maintaining the same fiscal discipline that made you successful will continue to be important.
Learn from your mistakes
No matter how careful you are and how much homework you do, there will be blunders along the way. There will be tenants who refuse to pay the rent, renters who feel free to destroy your property and houses that go down in value instead of up. Real estate investment can be complicated, with lots of moving parts and lots of things that can go wrong. You cannot avoid the inevitable mistakes, but you can tip the odds in your favor by learning from those errors. If you are willing to admit your imperfections and learn from what you did wrong, you can come out stronger than ever before. If you are looking for a smart investment that pays real dividends, there are plenty of reasons to invest in real estate. You will need the right guidance, and you will need to choose the right property and of course the perfect agent to help you every step of the way but once you do, you can enjoy a steady stream of rental income, month in and month out.