Some of the most successful investors in the world have a large portfolio of rental properties. Real estate investing has traditionally always been a very sound long-term investment, even in times when the market is not so good.
As such, you may be thinking about jumping into the real estate investing landscape to become a landlord and obtain a good return on your investment.
Before you dive headfirst into the pool of real estate investing, though, you should make sure that you are prepared for all that’s ahead of you.
Here are four tips to keep in mind before you buy your first rental property.
Make Sure You’re in a Good Financial Position
If you already own a primary residence, then you definitely know that the better off you are financially, the better you’ll be positioned to qualify for a mortgage with the best terms and for a high amount.
If you are looking to finance the purchase price of a rental property, though, it’s even more important that you ensure you’re in a great financial position.
You may be fully aware of all the various mortgage loan types that are available to homeowners.
When it comes to financing the cost of a rental property for investment purposes, though, there are not as many.
In fact, many lenders may only offer you a conventional loan as a way to finance your real estate investing goals.
This means that in addition to having a low debt-to-income ratio and a good credit score, you’ll also need to have a hefty chunk of money to use as a down payment.
Most lenders will require at least a 30% down payment on a rental property.
Research the Market from a Real Estate Investing Standpoint
Searching for a rental property to buy is slightly different than searching for a primary residence to purchase.
When you are searching for a primary residence, you obviously will be looking for a property that fits your needs, is within your budget and has the ability to grow in value over time.
When you are looking for an investment property, though, you need to also consider what the average rental rates are for the location, as well as the demand for rental properties.
There are many online tools available that can help you see local rental prices, including this great rental calculator from Zillow. By plugging in the specific address of the home you’re considering purchasing, you’ll know whether it is a good fit for you from a real estate investing standpoint.
Consider Investing In Foreclosure Homes
You may also want to consider using sites such as Foreclosure.com to help you find foreclosure homes on the market in your area.
The advantage of investing in a Foreclosure home is that they are sold below the market value.
Another advantage of purchasing foreclosure homes as rental properties is that you, as the real estate investor, will be more likely to secure investment property financing.
In some cases, if you are buying the home from a bank, the bank will give you a better financing deal in order to get rid of the investment property.
Figure Out the Margins of the Rental Property
The most successful real estate investors have a clear financial goal in mind and stick to that goal when they are assessing a rental property’s viability as an investment for them.
Large investment firms will often look for returns around 5-7%.
Individual real estate investors may look to earn closer to 10%, though, since they often don’t have a huge portfolio of rental properties they own.
To figure out your margin, it’s not as simple as taking your expected monthly rental rate and subtracting your monthly mortgage payment.
You’ll need to factor in other costs associated with being a landlord, such as property taxes, insurance and any homeowners’ association fees.
Keep in mind that you’ll want to create line items for other expenses such as maintenance costs (which could end up being 1% of the total value of the property, annually), landscaping and repairs.
Make Sure You Have the Time, and Interest, in Being a Landlord
Running a rental property as a landlord is not the same thing as maintaining your primary residence.
In addition to improving the home and maintaining it over time, you’ll also need to become a good marketer so that you can set the appropriate rental price and find a tenant.
If you would not consider yourself a handy person who can do routine maintenance, then you’ll need to factor in costs for hiring a property maintenance company to handle that for you.
Finally, if you’re considering real estate investing, make sure that you know what you’re getting into and that you have the time and interest in becoming a landlord.
It’s not a job that’s as simple as collecting a rental check each month.
Before you buy your first rental property to build your real estate investing portfolio, make sure that you keep these five tips in mind.
If you are in a great financial position, can seek out hidden gems in the market, understand how to calculate and maximize margins and can stomach being a landlord, then a rental property could be a great investment tool to help build your wealth.