Tips for Buying Your First Rental Property
If a new home is the largest investment you’ll ever make, purchasing a rental property isn’t far behind. You’ve worked hard to get where you are today and the truth is, taking on a second mortgage is a big task. Once you’ve built up your deposit for the loan — which can be substantially higher than the deposit for your first home — there’s so much to consider before signing on the dotted line.
Among all of the financial decisions that investing in real estate involves, figuring out exactly where to buy a house to rent out is key. Take a look at the factors that go into deciding where you should buy your first rental property so that you’re making an informed financial decision. In order to get the biggest return on your investment, you’ll need to take into account the market conditions of your target neighborhood as well.
How Do You Know When You’re Ready To Buy a Rental Property?
Before you decide on where to buy, you need to know if you’re ready to buy. Here are a few financial factors to keep in mind that can indicate you’re in a position to buy a rental property.
Be ready to put down at least 20 percent. If you’ve already purchased a home, your minimum down payment was likely somewhere between 3-5 percent depending on a number of factors. But that’s not typically the case when it comes to buying a second home or a rental property. Mortgage lenders are likely going to require a deposit of at least 20 percent of the purchase price. That’s because private mortgage insurance isn’t allowed for second homes as they’re considered investment properties. So it’s important that you’re saving money to meet that requirement.
Prove positive cash flow before you buy a property. Now that you’re going to be responsible for two mortgage payments, lenders will be looking for a history of positive cash flow from your bank accounts. Be ready to deliver bank statements that help to prove your long-term finances are in order and able to carry a second mortgage. Keeping your closing costs to a minimum by requesting the seller carry some of your fees can also assist you in holding onto cash that you can retain to help your cause.
Expect a higher interest rate. Loans for second homes will usually come with a higher interest rate than those offered for a primary residence. You may need to fold that extra expense into the rental price in order to make the loan work.
What’s the Best Way to Pick a Location for a Rental Property?
There’s so much consider when deciding where to purchase an investment property. You’ve got to up your property manager skills, for starters. And it’s also time to think carefully about the neighborhood you’re choosing. Setting yourself up for success also means aligning with a real estate expert, too. So before you start the buying process, consider signing with a trustworthy real estate agent that can help you make an informed decision.
Decide on a property type. Single-family homes are a type of property that many first-time rental property purchasers aim towards because they’re likely to require less maintenance. This means that you’ll likely be able to convert more of your gross rent into profits than you would with a multi-unit property.
Get in front of a real estate agent. It’s a good idea to meet with several real estate agents before you decide to go with one. You may find that certain groups are better connected to rental property opportunities than others. Leverage their existing network to help you find a great spot. Often their insider information can steer you to consider a residence that has yet to go on the market. And if the homes are selling quickly in your target area, you’re going to want to be an early bird.
Look at recent real estate investors’ purchasing trends. It’s important to invest in a neighborhood where home prices are trending upward. This way, you’ll increase the odds of that trend continuing and maybe even gain equity on the purchase year after year, as property values increase. This will only increase your resale value as you collect monthly rent and pay down your mortgage.
Look at your purchase through the lens of a landlord. Will this property and neighborhood attract the type of tenant that will be able to afford the rent? Will they be good tenants and agree to get renters insurance while also taking good care of your home? Often, a well-kept neighborhood attracts more respectful tenants.
Estimate your rental income before you buy a home. Once you’re ready to buy, consider your ideal financial situation. Look at the amount you’ll be receiving in rent and then deduct the mortgage’s monthly payment, property taxes, assessments and landlord insurance. Take a look at rental listings on Zillow and Craigslist and plug in your home’s particulars like zip code, square footage, amenities and number of bedrooms to be sure your home will be able to generate the amount of income required for it to be a profitable investment.
Consider upgrade and maintenance costs now. Will your rental income be enough to cover expenses that may be needed to get it into a rentable condition? If your budget’s too tight, you may find yourself unable to turn a profit in the months ahead. Perhaps the roof’s going to need replacement soon, remember to factor that expense into your decision. And it’s important to anticipate upkeep costs like plumbing and electrical repairs as well. So put together a team of expert contractors that can help you maintain your rental home if it should need some work.Hopefully you’ve now got a better idea of what it’s going to take to make that final decision on when and where to buy. While you’re getting these details organized and considering your financial options, remember to check in with your American Family Insurance agent to learn about our Landlord Toolbox. It’s a great resource for new and veteran investment property owners, full of useful information and great ideas.