Purchasing Rental Property
Once you’ve made the big decision to invest in a rental property, there’s a lot to do. The tasks ahead of you may seem overwhelming, but if you break the process down into sections, you’ll find it’s really quite simple. And if you’ve ever purchased a home before, a lot of this will feel familiar. We’ll explore how to purchase rental property through the lens of a real estate investor — seeking a rental space with that perfect combination of affordability and potential for profit. Then, we’ll review the basics of becoming a landlord, with a focus on tenants, leases and legal issues. Take a look at our tips to help your big investment succeed.
Buying Your First Rental Property
Let’s start at the top and work down. You’re going to need a sizable down payment to even be considered for the loan. A positive credit report, along with bank statements proving positive cash flow every month will also be necessary. Once that’s in place you’ll need to find a broker you trust. Locating the right real estate agent who’s familiar with market trends can put you at a distinct advantage. With their experience and insights, they can steer you to opportunities that you may not have seen on your own.
Next, search for a mortgage with the best terms possible. You should pursue a deal that works for you in more ways than just a low interest rate. Other factors, like discounts on closing costs and fees can help keep cash in your pocket when it’s time to close. Lastly, you’ve got to make a decision on whether to maintain the space yourself, or hire a property manager to take care of it for you. If you decide to outsource the care of your rental, be sure to factor in the property management fee.
Know Your Money First
Where Should You Purchase Your Rental Property?
Once you’ve met with a lender or mortgage broker and determined how much rental property you can afford, it’s time to narrow down your decision. By getting online and searching for neighborhoods that have consistently been rising in property value, you can rule out areas that are underperforming. Then, help take the guesswork out of your purchase and dive deep into the math and formulas that industry professionals use to help predict the rate of return on your investment.
Depending on your situation, it may make sense to buy a duplex and move in to one of the units. Owner-occupying can be a great intro to investment property ownership because your tenant will be splitting the mortgage with you. Lenders look at this type of purchase as a hybrid, where you’re both owner and landlord. However, you’ll also be responsible for repairs and upgrades for two properties, and those costs can be substantial. If you decide on a fixer-upper, keep in mind that you’ll need cash on hand to rehab both living spaces, perhaps before taking occupancy.
Weighing a Single Family Purchase Against a Multi-family Buy
When determining a type of property to invest in, it pays to explore your financial goals first because different types of housing have unique payoff profiles. Are you seeking a return on investment (ROI) within five years? Single family homes are great rental investments when a short-term ROI is the goal. But what if you’re in for the long haul? Multi-family purchases may need a longer period of time to break-even, but they often see a greater ROI. Although single family homes may attract a more reliable tenant, a vacancy equates to a total halt of rental income. The vacancy risks of a multi-family unit are reduced because it’s rare that all units are vacant at the same time.
Finding a Qualified Tenant
After you close the deal, it’s time to seek out prospective tenants that will treat your new place like their own. Work with a real estate attorney to customize a lease that matches your property’s design. Consider variables like your tenants owning pets. Will you require a larger security deposit? If so, what are the terms? Will you require your tenant to give you notice of their intention to move out sixty days in advance, or ninety? What are the local and state laws governing security deposits and tenant notice that can directly impact these policies? You’ll need to verify compliance with the state and local codes here or risk legal actions taken against your business.
Leverage Your Current Home's Equity
Thoroughly Vet Your Prospective Tenants
Do your homework before signing on a new tenant. This starts by having all the information you need to choose the best candidate. Be sure to run a full criminal history and background check in addition to pulling a credit report so you’ll see more clearly how your tenant’s operated in the past. Our partnership with TransUnion’s SmartMove can help take the guesswork out of selecting the optimal candidate. The ResidentScore they deliver even takes into account eviction history, giving you the data you need to make an informed decision. Check in with your attorney to be sure your selection process is in compliance with the Fair Housing Act and other state or local codes that may be in play.
Have a plan for lease renewals from the start. Because you’ll eventually be replacing your tenant, be sure to take that into account as you draft your initial lease with your attorney. By defining the terms that describe how the tenant is required to give you notice on renewing, they’ll be informed from the beginning of your requirements. You can insulate yourself from financial loss if their notice to vacate is delivered late, or if they give no notice at all by fining or withholding security deposit funds if they don’t comply.
Build Your Maintenance Roster Now
Lastly, as a newly-minted landlord, you need to look into the future and schedule routine maintenance on the rental. If you can take care of heavy-duty maintenance issues yourself, you may be able to save labor fees. But when a pipe bursts in the basement at 2 AM, are you going to know how to deal with the issue and resolve it quickly? We recommend that you make connections with contractors and key players before you need them. Tradespeople are just one example of the experts you’ll need in your corner as a new property manager. Try reaching out to nearby landlords and introduce yourself — you may find reliable, local resources to help round out your roster.
How to Insure Your Rental Property
Just like any other important rental property decision, selecting great insurance for your real estate investment can save you thousands down the road if something should happen. Protecting your investment and your dreams is what American Family Insurance is all about. Our expert agents will help you understand how your property is covered so you’ll have the confidence to focus on your business. Get in touch with your agent today and find the peace of mind that only comes with knowing your investment’s well-protected.
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