5 Must-Know Tips When Buying Rental Property
Updated: Dec 9, 2019
Real estate has long been considered a sound investment — but that doesn’t mean it’s a foolproof way of making money. As with any investment, it’s essential to educate yourself about the market and weigh up the pros and cons, in order to protect yourself from making a risky financial decision.
Here are five must-know tips about buying a rental property, and starting your journey to real estate tycoon.
Get Your Finances In Order
Investment properties typically require a much larger down payment than owner-occupied homes, so you should aim to have a down payment of at least 20%. You should also try to pay down as much of your existing debt as possible before purchasing an investment home, as this will help to improve your debt-to-income ratio — and your credit score. Interest rates tend to be higher on investment properties, so a strong credit score is vital to get the best rate possible.
Work Out Your Margins
There are a lot of expenses to consider when purchasing an investment property. From home insurance, landlord insurance, and property taxes, the costs can soon add up. However, it’s crucial that you accurately predict your expenses, because you’ll need that figure to calculate your potential cash flow.
Cash flow is the amount of rental income you think your investment property will make, minus the expenses it costs to keep. For example, if a property earns a rental rate of $2000 per month and has $15,000 in annual expenses, the annual cash flow will be equal to $9,000.
If you estimate that your potential investment property will yield a negative cash flow, it’s probably not worth the hassle, unless you anticipate the real estate value to go up significantly in the future.
Learn The Local Market
Finding a profitable rental property requires an in-depth knowledge of the local property market. It’s crucial to consider things such as the property tax rate, the job market, the surrounding amenities, the school district, and the local crime rate. All of these factors will heavily impact the profitability of your rental property and should be taken into account when making your decision.
Don’t Bite Off More Than You Can Chew
If this is your first investment home, or you’re not familiar with the area it’s located, it’s important to not be overly ambitious with your property choice. A cheap fixer-upper may seem like a bargain at first sight, but if you lack the necessary DIY skills, or don’t already have reliable contractors that you work with, it could end up costing you a lot more than time in the long run.
For investment rentals, try to stick to houses that need a little bit of cosmetic work, or are move-in ready. The better condition that a property is in, the sooner you can have tenants move-in and start generating an income.
As with any investment, it’s essential to keep your expectations realistic. If it seems too good to be true, it often is. Investing in rental property isn’t a “get rich quick” scheme, but if done carefully, it can generate you a fruitful passive income for many years. To help ensure your success as a landlord, consider working with a professional who has experience purchasing rental properties.
If you'd like more information about investing in single-family rental properties, or some general financial advice and useful tips, check out our podcast.
All information and materials in this article are for educational purposes only. Opinions expressed in this article are based on information considered reliable, but The Daily Money Show cannot guarantee the accuracy of the information nor should it be relied upon. The information discussed in this article should not be used as a recommendation to buy or sell securities nor should it be taken as investment advice. The Daily Money Show is not a Registered Investment Advisor or Broker Dealer. The Daily Money Show is not an accounting firm and does not give tax advice regarding any security or real estate transaction. You may want to consult with an accountant, attorney, real estate agent or financial advisor before proceeding with any transaction regarding securities or real estate.