The Ultimate Beginner’s Guide to Buying a Rental Property
- Buying rental property can be a great way to build wealth and generate passive income.
- The most common mistakes that new investors make include jumping in before thoroughly researching the market and costs and not understanding the laws and regulations regarding rental properties.
- With the right approach, real estate investment can be a valuable addition to your portfolio.
Investing in real estate can be a great way to build wealth and generate rental income. However, rental property investments come with a unique set of risks and requirements. As with most things, it’s important to research and proceed with caution before diving in. To this end, we’ve developed a beginner's guide to getting you started on the key steps and considerations involved in buying a rental property.
But first, why should you consider rental property an investment option?
Image Credit: fukomuffin / Shutterstock.com
Advantages of Investing in Rental Property
Investing in a rental property is a way to save for retirement and build your wealth. One of the biggest advantages is long-term, steady cash flow. As a property owner, the rent will cover your mortgage payments, property taxes, and other expenses while still providing a profit. Additionally, rental properties offer the opportunity to appreciate over time, providing an increase in your net worth.
A second advantage of owning a rental property is that real estate provides valuable deductions that can lower your overall tax bill. The interest expense associated with your mortgage, property tax payments, renovation costs, repairs, and depreciation can take a sizable chunk out of your tax bill. In addition, a lower tax bill provides you with a net income boost, since the amount of cash you retain increases with every dollar saved on taxes.
Recommended Read: Tax Tips for Entrepreneurs | Culture Meets Money with Atiya Brown
Finally, rental properties provide stability and predictability to your investment portfolio, as the demand for rental housing is generally consistent, and not necessarily subject to the same fluctuations impacting the stock market. Said another way, while the demand for commodities such as coffee beans, copper and crude oil might swing up and down, people will always need a place to live.
Image Credit: WHYFRAME / Shutterstock.com
Risks of Property Investment
While investing in a rental property can provide many benefits, it has potential drawbacks. Some of the challenges of investing in rental properties include:
- Maintenance and repairs: When you buy a rental property, you sign up to become a landlord, complete with a laundry list of time-consuming tasks such as renting the unit, addressing maintenance issues, and collecting rent. Hiring a property manager is a great way to minimize your day-to-day involvement in this role.
- Vacancy and non-payment of rent: When a tenant moves out, maintenance expenses such as repairing any holes in the drywall, painting the unit, and updating the fixtures will come with a price tag. The unit will sit vacant during this rent-ready period, thus imposing a second cost: zero rent. Quickly addressing maintenance issues raised by your tenant can help minimize rental turnover and unit vacancy.
- Legal responsibilities: As a landlord, you are legally obligated to make your unit safe and habitable. Researching and learning about the state and federal rental laws that apply to your unit are essential in minimizing this risk.
- Financing: Financing investment properties are typically more expensive and complex than a residential mortgage, entailing more stringent qualifications, a larger down payment, and a higher interest rate. Purchasing a rental unit that serves as your primary residence, for instance, a duplex, triplex, or fourplex, will generally allow you to qualify for a lower-cost, standard FHA mortgage.
So now that you’re armed with the pros and cons of becoming a real estate investor, let’s explore the best ways to get started.
Recommended Read: How to Invest in Real Estate While Working Full Time
8 Tips for New Rental Investors
- Research the market: First, you must decide where to invest. Do you prefer an urban, suburban, or vacation vibe for your property? Would you like to live a quick car ride away, or hundreds of miles from your investment? To help determine where you’d like to purchase a property, look at factors such as the local economy, population growth, and the job market. Also, research comparable rental properties in the area to determine a fair market rent for your property.
- Property Type: Next up is to consider the type of property you want to own. Rental properties come in a wide range of varieties, from single-family homes, townhouse, or condo, to a multifamily home such as a duplex, triplex, or fourplex. Each property type has its pros and cons, so it's important to evaluate which is best suited to your goals and resources.
- Consider the costs: Understand the costs associated with owning a rental property. These include mortgage payments, property taxes, insurance, and maintenance and repair costs. Make sure you can afford these costs and still turn a profit.
- Understand the laws: Know the local laws and regulations regarding rental properties. This includes understanding your rights as a landlord, as well as your responsibilities for maintaining your property and ensuring the safety of your tenants.
- Screen tenants carefully: Carefully screen all potential tenants. Perform background checks and check references to ensure you rent to responsible, reliable tenants. If you are hiring a property manager to screen tenants, discuss the fair housing laws with your manager to ensure you understand them and follow them.
- Record everything: Keep accurate and organized records of all transactions related to your rental property. Keeping track of important documents will help you stay on top of your finances, maintenance requests, and repairs.
- Expect the unexpected: Be prepared for emergencies by setting aside money for unexpected expenses. A good rule of thumb is to have an emergency fund equal to three to six months worth of rent to fund a sudden roofing or furnace issue, or keep you afloat if your tenant stops paying rent.
- Seek professional assistance: Consider seeking the help of a real estate investment coach, property manager, or lawyer if you are not comfortable finding a real estate investment property on your own, or don’t have time or interest in managing it. A seasoned professional can help you navigate the legal, financial, and operational aspects of owning a rental property.
The Money Wrap-Up
Buying a rental property can be a great way to build wealth and generate passive income. However, it’s essential to do your research and carefully consider the potential risks and rewards before making any investment decisions. It’s also important to have a solid plan in place for managing and maintaining your property, as well as having access to the necessary funds for any unexpected expenses. With the right approach, real estate investment can be a valuable addition to your portfolio.
Main Image Credit: Lemonsoup14 / Shutterstock.com