15 Tips For Buying Your First Rental Property

Buying your first rental property is exciting and overwhelming. Done right, it can create regular cash flow and incredible capital gains. But, like any investment, rental properties have a way of wrecking your finances in one fell swoop when not done right.

Here are 15 tips to make buying your first rental property stress-free and successful.

1. Get Out of Debt

Paying off existing debt before investing in a home is important. With lower monthly obligations, you won’t feel as much pressure with your investment property. If you’ll borrow money to buy the investment property (recommended), that’s enough debt to add to your plate. If you have student loans, credit card debt, or personal loans, wrap them up as best you can before investing in a home. Chances are the interest rate charged on your consumer debt will exceed the rate of return you receive on your investment property. But, if you know your returns will exceed the APR on your existing debts, getting out of debt isn’t as crucial.

2. Save Money For A Down Payment

Lenders typically want a sizeable down payment on investment properties. Figure that you’ll need 20% - 30% down on a home to get attractive financing terms. Lenders take a large risk lending you money for an investment property, but the more ‘skin in the game’ you have, the more attractive the terms they can provide. We don’t recommend investing all your money in the home, though. Make sure you leave enough for reserves (emergencies) for both the rental property and your residence.

3. Maximize Your Credit Score

Financing a rental property usually makes the most sense. If you put all your cash into a property and it fails, you lose everything. When you leverage the investment by financing some of the purchase, you have cash reserves to invest elsewhere and diversify. To get the best terms on a mortgage, you’ll need an excellent credit score. Because investment properties are riskier for investors, lenders require higher credit scores. To increase your credit score, do the following:

• Bring any late payments current.
• Take care of any collections.
• Lower your outstanding credit balances to less than 30% of your credit lines.
• Avoid opening new credit unless absolutely necessary.

4. Determine Your Investment Strategy

Consider your long-term plans for the investment property. Do you want a turnkey property you can keep for the next 10 - 20 years and enjoy the cash flow, or is this a temporary purchase that you’ll sell in a year or two? Knowing if you’re in this for the short or long term will help you choose the right property. Long-term investments require more analysis to determine which market has a long history of successful rental properties. You’ll also need to determine if you want to do a fix-and-flip or buy a turnkey property. Fix and flip investments are riskier and take a much more significant investment since you need the capital to fix the property up and then the support to sell the property right away, ‘flipping’ it for a profit.

5. Choose Your Market

Your investment strategy will also determine the right market. For example, are you looking for rapid appreciation or steady rents? Any market can change in the blink of an eye, but looking at historical sales prices, rental histories, and the overall market right now will help you understand which market will help you achieve your goals. For example, if rapid and high appreciation is your goal, you’ll want to invest in ‘richer’ areas along the coast or in high-cost areas, such as Washington DC or San Francisco.

6. Create a Powerhouse Team

We can’t say this enough - you can’t invest in real estate and do it yourself. No matter how many superpowers you think you have or how knowledgeable you think you are, it’s impossible. The best real estate team should include:

• Powerful real estate marketplace
• A real estate lawyer
• Property management company
• Tax or financial advisor

7. Understand What It Means to Be a Landlord

You hear all about the cash flow and capital gains investors earn but do you really know what it means to be a landlord? It doesn’t just rain money, and you sit back and enjoy it, although that sounds amazing, right? Being a landlord means responsibility. You own the property and are responsible for all financial and physical aspects of it. This could mean 3 AM phone calls for emergency repairs, dealing with renters who don’t want to pay, or unexpected vacancies that require you to find new renters. This is why having the dream real estate team on your side is important. You need someone covering your legal rights, a company to handle emergencies, rent issues, and finding new tenants, and someone making sure you follow all tax laws.

8. Understand Your Insurance Needs

Your lender will make sure you have homeowner’s insurance, but don’t overlook the need for landlord insurance too. Landlord insurance protects your investment in the home should you suddenly face defaults, liabilities, or other issues. It also protects your financial interest should someone or something suffer damage on the property (you own it). Talk to your insurance provider about the options available in your area.

9. Calculate Your Monthly Cash Flow

As the landlord, you’re responsible for all expenses on the property. This includes the mortgage payment, real estate taxes, and real estate insurance. If there’s an HOA fee or you have PMI on the mortgage, those affect your cash flow too. In addition to the mortgage expenses, you’re responsible for the home maintenance and repairs. This includes minor and major expenses. As a general rule of thumb, figure operating expenses will cost at least 50% of the rent you charge. This will help you determine if the cash flow is worth it when choosing an investment property.

10. Plan for the Worst (Vacancies and Defaults)

Even when you buy a turnkey property already outfitted with tenants, life happens. Tenants leave or default on their rent. No one knows 100% what will happen one, two, or five years from now. As a landlord, the best thing to do is plan for the worst. This is why the reserve account is so important. Knowing you can cover the mortgage without the cash flow from rent is important, so you don’t default and lose the property because the renters defaulted or vacated the property.

11. Know Your Legal Obligations

Every location has different rental laws covering landlords and renters. Having a real estate attorney on your side is important. He/she can help you navigate the eviction rules, security deposit laws ensure your lease agreement is legal. Knowing you’re following all legal obligations is important as it can avoid legal obstacles and even lawsuits if you violate a renter’s rights.

12. Focus on Low-Cost Properties

Even though you can leverage a property by borrowing a large portion of the sales price, don't’ get in over your head. High-cost properties come with high-cost problems. Not only are they more expensive to maintain and repair, but you’ll also have to borrow more money, giving you a larger mortgage payment, and it’s harder to find renters. When you buy a low-cost home in an area that’s popular with renters, it’s easier to keep the property occupied, and it’s cheaper to maintain. You should always be looking at your bottom line (cash flow), and the more stable your income and the lower your costs, the higher your cash flow.

13. Consider Long-Distance Real Estate Investing

Sometimes the best place to invest isn’t in your backyard. Even though it’s easier to maintain the property yourself when you live close by, it can also be a hassle. If you live in a high-cost area, it may even seem impossible to get financing or to compete with all-cash buyers. When you take a broader approach, looking at long-distance properties, you can find lower-cost properties and better rental markets. Using property management companies becomes crucial when you invest in long-distance real estate. Still, if the cash flow is there, it can help your bottom line and diversify your portfolio.

14. Focus on Single-Family Properties

Single-family homes often have a higher rate of return and are overall easier to manage. When you invest in a condo or townhome, you have to deal with city or county regulations and the HOA regulations regarding rental properties. Think of your time and money as they are both valuable resources when you invest in properties. Focusing on single-family properties may save you more time and hassle, not to mention avoid the HOA fees, unless you find a property in an association.

15. Use an Online Platform to Find the Right Investment Property

Finding the perfect investment property takes a lot of legwork. Not only do you have to find a property, but you have to do careful research too. The home’s historical sales price, rental history, and the area’s overall rental demands are just the tip of the iceberg. A property inspection, lease analysis for current tenants, forecasted rent analysis, and net cash flow analysis are also important factors in the property you buy. Using a platform that focuses on real estate properties, including turnkey properties, is essential. You’ll get the information you need all in one place, allowing you to save time and be the first to jump at the best investment property opportunities that come along.

The Bottom Line

Buying your first rental property can be exciting! It’s your first step in diversifying your investments and taking advantage of the lucrative real estate market. Investing in real estate is much different than investing in stocks or bonds. You need a team of support, not just a stockbroker like you do with stocks. With the right professionals on your side and the right platform to match you up with the right properties, you can find the perfect property to start your real estate investment portfolio.