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How to Buy Your First Rental Property

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Buying your first home has long been considered a rite of passage into adulthood. It’s a symbol of financial stability and maturity. But buying your first rental property is an even more significant rite of financial passage. It symbolizes the onset of passive income through real estate investments.   

A rental property brings returns through long-term appreciation and passive income from rental payments. These factors are what makes real estate a lucrative component of a financial portfolio.

Are you ready to earn some passive income? Here’s how to buy your first rental property. 

Step 1: Take a Look at Your Savings and Future Needs

It’s a good idea to go through your savings to understand how much money you have to work with. Consider your budget over the next few years. Are you expecting any major expenses? Can you afford to make a mortgage payment?

Keep in mind that real estate is an illiquid asset. Once you’ve bought a property, it will take time to sell it and get your lump sum back. Some properties can sit on the market for months or even years. Ask yourself if you can tolerate not being able to access your funds for an extended amount of time. 

Finally, real estate should be only 1 part of your investment portfolio. You don’t want to keep the majority of your savings locked into real estate assets in case you can’t sell a property quickly or if the market dips. Remember to leave room for other investments like stocks and bonds. 

Step 2: Go Through Your Financing Options 

There are 3 main ways you can finance your first rental property:

  • If you have enough saved up, you can buy your rental property by paying cash
  • You can take out a mortgage for a rental property the same way you take out a mortgage for your residential home. That said, it is more difficult and more expensive to get a loan for a rental property. You’ll generally need to put down at least 20% for a down payment and have enough cash for at least 6 months of expenses. There may be higher credit and income requirements, depending on your lender’s requirements.
  • If you are a homeowner, you can take out a home equity line of credit, also known as a HELOC. Depending on your creditworthiness, you can borrow up to 85% of your home’s value, minus the amount you owe on your mortgage. You can borrow as much as you need up until the credit limit and only pay interest on what you borrow. 

Consult your bank first to learn if you qualify for these financing options. It’s also a good idea to get in touch with different banks and lenders so that you can compare offers to get the best deal.

As soon as you find the lending option that works for you, secure it. You want to be preapproved for a mortgage or already have a HELOC open before you start looking at properties. 

Step 3: Decide What Type of Landlord You Will Be 

Being a landlord comes with a host of responsibilities. You’ll have to find tenants, run background checks, comply with government building codes, fix any unexpected maintenance issues, bookkeep and deal with defaulters – among other responsibilities. Basically anytime your tenant has an issue – you can expect a call. 

Ask yourself whether you have the time to take on this role. You can always choose to outsource these tasks to a property manager, but it will come with a cost. The cost will ultimately depend on the property manager you choose to work with, but in some cases it can range from 8%-12% of the monthly rent value. 

Step 4: Research the Market

Now that you have a good understanding of your budget, it’s time to investigate home sales and rental prices. At this point, you’ll want to hire a realtor or use a real estate marketplace platform to browse different neighborhoods and properties. 

Location is everything. If you invest in a declining neighborhood, it’s possible your property will actually lose value over time. You can spot up-and-coming neighborhoods by looking at population growth, job growth, quality of school systems, infrastructure and proximity to major urban areas.

Step 5: Conduct a Property Analysis

Have you found a few potential candidates that look like they could be a good investment? The only way to know for sure is by doing a property analysis. The most common method is by calculating the return on investment (ROI). This figure will help you understand how profitable an investment property will be, and how that profitability compares to other properties. 

Let’s say you’re looking to buy a property that has a price tag of $100,000. Take a look at what similar properties are renting for in your market to get an idea of what you can charge. Let’s say you can rent it out for $1,000 a month. Your annual rental income is $1,000 x 12 months for a total of $12,000. 

Now take a look at how much it will cost to own this property. Typical expenses include taxes, insurance, renovation costs, maintenance fees, association fees and property management fees. Let’s say your total expenses add up to $600 a month, or $600 x 12 months for a total of 7,200 a year. 

Your actual annual income from this property will come out to $12,000 – $7,200 = $4,800 a year. The final step is to divide your actual annual income by the sale price of the property, not including the interest you will pay on a mortgage. Your total return on investment (ROI) is $4,800/$100,000 = 0.048, or 4.8% 

Compare ROI between different properties to spot the most profitable investment opportunity.  

Step 6: Get Ready to Make an Offer

If you’re financing through a lender, they will most likely order an appraisal. An appraisal is a professional estimate of the value of a property. Both you and your lender will want to make sure you’re paying a fair price. Once you have an appraisal that’s been approved, it’s time to make an offer!

Remember to make the offer contingent on a home inspection. You’ll need to pay for a home inspection out of pocket so it’s best to do so after you’ve set your sights on a property. If the inspection finds potential issues with the property, you can use these issues to renegotiate your offer.

Step 7: You’re on Your Way! 

You’re almost at the finish line. At this point all that’s left to do is close the deal. Sounds easy enough, but this process can be time-consuming and confusing if you’re not prepared. 

The first thing to do is set a closing date. The closing date is when you will officially pay for the home and become the new owner. If you are financing the property with a loan, it is the date you will receive the funds and pay for the down payment and closing costs. 

An attorney, real estate agent, escrow agent, or someone else might be in charge of the closing. They will set the time and place. Ask them what you will need to bring. This may include your ID, proof of wire transfer, closing documents and more. 

Once all the signatures have been signed and the funds have been wired – congratulations! You will have successfully bought your first rental property. 

Best Investing Platforms for Out of State Real Estate

Here are some of Benzinga’s top picks for online real estate investment platforms. 

Commissions
No management fees
Account Minimum
$500
Get started securely through Diversyfund’s website
Commissions
No management fees
Account Minimum
$500
1 Minute Review

DiversyFund isn’t your average crowdfunding platform. You’ll find that the company puts a twist on the traditional everyday crowdfunding platform, beyond anything you can find online with a simple Google search. You only have to look under DiversyFund’s skin one layer to surmise that DiversyFund is a conscientious developer and sponsor and helps hedge risk through improved vetting.

DiversyFund offers a multifamily real estate investment trust, the DiversyFund Growth REIT, and its main goals are to increase cash flow and resale value. It’ll automatically give you access to multi-million dollar real estate assets.

Best For
  • Those looking for an alternative investment beyond stocks and bonds
  • Individuals who aren’t sure they want to be landlords in the traditional sense
  • Investors who aren’t accredited
Pros
  • Only need to pony up $500 to get started
  • Open to investors all over the world
  • No expensive broker fees
Cons
  • You’ll only be able to access “blind pool” investments, which means that you can’t opt out of specific properties
  • There’s only one real investment option, the DiversyFund Growth REIT
Commissions
1% – 1.75%
Account Minimum
$10,000
Get started securely through CrowdStreet’s website
Commissions
1% – 1.75%
Account Minimum
$10,000
1 Minute Review

CrowdStreet is a commercial real estate investing platform where people can invest directly in commercial projects. Unlike a brokerage firm, CrowdStreet isn’t a middleman. Instead, the platform acts as a marketplace where investors can pick and choose the best deals for their time horizon and strategy.

Available investments range from family living spaces to office buildings to storage facilities and investors can sign up for a free membership. Your investment options are limited to what’s live on the Marketplace and you’ll need capital to build a diverse real estate portfolio. Only accredited investors can access deals through CrowdStreet.

Best For
  • Investors looking for diversification away from stocks
  • Real estate investors interested in new opportunities
  • Accredited investors with lots of capital at their disposal
Pros
  • Unique opportunities available
  • Makes real estate accessible and understandable
  • Investors can devote capital to both debt and equity offerings
  • Offers quality education materials and answers to FAQs
Cons
  • Real estate is highly illiquid
  • Most properties require a minimum $25,000 investment
  • You’re limited to what’s on the CrowdStreet Marketplace
Commissions
2% – 3%
Account Minimum
$1,000
Get started securely through stREITwise’s website
Commissions
2% – 3%
Account Minimum
$1,000
1 Minute Review

Looking to diversify your portfolio and get into real estate? A real estate investment trust (REIT) that owns income-producing real estate may be a great place for you to start. Streitwise is a REIT that specializes solely in commercial real estate and has a low entry investment requirement of $1,000. Based in Los Angeles, Streitwise was created in 2017 by three veteran real estate investors who were frustrated that there wasn’t a good option for unaccredited investors to get into the commercial real estate market.

Streitwise focuses on investing in low-risk rental commercial real estate aimed at providing clients with consistent high-yield returns. The team invests in markets that are steadily growing and offer low-risk potential outcomes. While they’re still young and growing, the founders have built their business based on solid experience coupled with a vision for the future of investing. If you’re looking to diversify your current investment portfolio but feared real estate was too lofty a goal, Streitwise is worth exploring.

Best For
  • Investors looking to diversify
  • Investors with less than $200k in annual income
  • Passive traders
Pros
  • Consistent quarterly dividends
  • Low, transparent fees
  • Low investment minimum
  • Convenient and easy to use
Cons
  • Young company
  • Projections are uncertain
  • Limited portfolio
  • Limited technology
Commissions
0.85% asset management fee per year
Account Minimum
$500
Get started securely through Fundrise’s website
Commissions
0.85% asset management fee per year
Account Minimum
$500
1 Minute Review

Fundrise, a real estate investment platform, allows small investors to gain exposure to a diversified portfolio of real estate projects hand-picked by the Fundrise team. Investors can choose between a starter plan and three advanced plans, all designed to meet certain investing goals. Each plan gives you an exposure to a specific portfolio which comes in a form of eREITs and eFunds, custom-made products which are not traded on security exchanges.

Best For
  • Small real estate investors
  • Passive investors
  • Long-term investors
  • Beginners
Pros
  • Allows small investors to get exposure to commercial real estate
  • Diversification in the real estate sector
  • Goal-oriented investing
  • Relatively low fees
  • 90-day guarantee
Cons
  • Liquidity issues as eREITs and eFunds are not exchange traded
Commissions
$99 for first Investment and then 0.50% setup fee after
Account Minimum
$5,000
Get started securely through Roofstock’s website
Commissions
$99 for first Investment and then 0.50% setup fee after
Account Minimum
$5,000
1 Minute Review

Roofstock is a registered real estate broker and marketplace specializing in single-family rental properties. Unlike its competitors, Roofstock isn’t selling shares of properties through trusts or LLCs — they’re connecting buyers and sellers directly. Roofstock properties are carefully vetted by a qualified home inspector and come with a rental income guarantee. That’s right, Roofstock will pay you rent even if your property stays vacant.

Financial data on each property is available even to those who are not clients and nonaccredited investors are welcome to join free of charge. Cash and financing options are available when making a purchase, but Roofstock will tack on their own fees in addition to closing costs.

As the solitary owner of your property, you’ll be expected to fund repairs out of your own pocket. Still, Roofstock is a great way to get a foot in the door of the real estate industry and their fees are much lower than most of the competition.

Best For
  • Nonaccredited investors
  • Real estate investors with limited capital
  • Investors looking for income through rental properties
Pros
  • Free to sign up
  • No investment minimum
  • Ownership of real assets
  • Low fees 30-day money back guarantee
Cons
  • Single-family homes only
  • Need to finance repairs yourself
  • Requires down payments

Patience is Key

Whether you choose to invest in real estate with a rental property or REIT, know that it is a long-term investment. You won’t see the largest rewards right off the bat. But with a smart strategy and some patience – you’re on your way to earning a steady stream of passive income.

Buying a rental property isn’t the only way to invest in real estate. If you don’t have enough capital saved up or want to avoid landlord responsibilities, consider these options: 

  • Real estate companies own and operate portfolios of different properties. Some real estate companies will issue publicly traded real estate stocks. These stocks are called real estate investment trusts (REITs). Learn about how to invest in REITs.
  • Crowdfunding platforms are another great way to invest in real estate. Many crowdfunding platforms have portfolios of different real estate assets you can buy into for a small investment minimum. Take a look at our DiversyFund review to learn more about crowdfunding.