You work hard and you have a great job, but you do have some extra time and you would like to begin to invest in real estate. You think that a duplex or fourplex would be a nice place to start, but you’re unsure of what steps you need to take before you take the plunge. Check out these six must-dos before you commit to investing in your first apartment.
Check Your Credit
Unless you have the ability to pay for your unit in cash, you are going to need financing, and to do that, you will need to have a decent credit score. If your score is in the upper 500s you may be out of luck, but if you are above the 700 level, you’ll have a much better chance at getting a loan. Therefore, check your credit report before you go to the bank, and report any inaccuracies to the credit bureaus.
Bonus tip: If you are going to live in one of the units and rent out the others (also known as house hacking), you can probably buy the building as an owner/occupant rather than an investor, and that also will make financing easier and cheaper. Learn more by reading: Owner Occupied Multi Family Real Estate: The Best Strategy.
Understand the Neighborhood
If you have lived in your city for your entire life, you know the good neighborhoods vs. the bad ones. If you are going away to school and want to invest in your new college town, you should make sure you do quality research so that you understand the price/value relationships of properties there. While a cheap investment property in a lesser neighborhood may require less debt service, it may not be able to generate high enough rent, so be careful.
And don’t forget, you can use local, neighborhood rent reports like this one from ABODO to make sure your pricing plan is accurate.
Related: 8 Best Cities for Apartment Investing in 2019
Consider a Buyer’s Agent
If you contract with a buyer’s agent, you’ll pay no commission, and you’ll have the advantage of an expert that is on your side when investing in an apartment.
Buyer’s agents represent you only, and their job is to get you the best real estate deal on the best property available. Sure, you can look online, probably get MLS listings and scour Craigslist for good deals, but it’s hard to go wrong when you employ a professional for free.
Related: How to Buy an Apartment for Investment: 5 Tips
Financing
Know the difference between 15 year and 30-year mortgages and understand fixed and adjustable rates. Be cognizant of exactly how much time the bank gives you to make your monthly payment (grace period) so that you are sure that tenant rental payments line up with your mortgage payment’s due date.
Be Prepared
You need to do a sample profit and loss spreadsheet that lists your expenses and the rent that will be coming in to cover them. You may think that if you are clearing $100 per month, you’re doing well but realize that one major repair can cause you to lose money quickly. Therefore, you need to have money in the bank to take care of unexpected issues.
Related: How Much Profit Should You Make on a Rental Property?
Vacancies and Raising Rent
If you are clearing our aforementioned $100 per month and you’d like to see more rental property cash flow every month, raising the rent could be the answer—or not. Let’s say that you receive $950 in monthly rent and attempt to raise it to $1000.
Your tenant then balks at the increase and moves out. It could take a month to prepare the rental property for a new tenant and of course find one, and you, therefore, lose a month’s rent.
You would have been plus $600 annually if the rent increase stuck, but now you have lost $950 as soon as your tenant has vacated the property. In cases like these, smart landlords sometimes forgo an increase that might backfire and cause their tenants to leave.
Of course, there’s a lot more to becoming a landlord of an apartment than the six items we have mentioned, but if you understand and act upon those, you’ll be off to a good start.
This article has been contributed by our friends at ABODO Apartments.