Buying your first rental property can be a daunting task. However, it doesn’t have to be this way. With the proper advice, you’ll be able to successfully buy a cash flow rental property in 2020.
In today’s blog, we’ll go over 15 tips for buying your first rental property.
1. Create a Long-Term Investing Plan
Investing in rental properties takes a lot of time. As a result, you need to think in the long-term when planning the investment. Learn more about real estate investing and set a specific goal for the future. Be sure to keep your expectations realistic based on your financial capabilities.
When creating your plan, ask yourself pertinent questions such as:
- How much money can I spend on buying investment property?
- Should I plan for multiple rental properties?
- How does investing in rental properties tie in with my retirement plan?
- What investment strategies and property types should I commit to?
With these questions, you will be able to properly plan for buying your first rental property and for the future of your real estate investment.
2. Pay Off Existing Debt Before Buying Your First Rental Property
It’s strongly recommended that beginner real estate investors pay off debt before buying rental property. So, if you have existing student debt, unpaid medical bills, or a significant credit card balance, be sure to address those issues first. It’s better to pay off these debts and postpone investing as opposed to investing with these looming and potentially growing, financial burdens.
3. Use Leverage, Not Cash, When Buying Your First Property
For the vast majority of real estate investors, using leverage is the way to go with a property purchase. In other words, you will need to borrow money through a mortgage to finance the rental property. While this is another form of debt, it comes with its advantages. Firstly, it allows investors with little money to get in on the gains of real estate. It also maximizes the potential return on investment, as opposed to purchasing fully with cash.
Related: How to Finance Investment Property: Mortgage vs. Cash
4. Start Saving Up for the Down Payment and Building Your Credit Early
Buying your first rental property is known to come with a high down payment. For first-timers, it’s reasonable to expect at least a 20% down payment. Real estate investors also need a good credit score, with 620 considered good and anything above, better. Therefore, as soon as investors make the decision to buy a rental property, they should spend time and energy towards saving for a down payment and building their credit score. This should be done early on, even before you start your actual search for rental property. This will ensure you get qualified for a rental property mortgage once you do find a great real estate deal.
5. Analyze Rental Markets with a Heatmap
The three most important things in real estate are location, location, and location. This is true in 2020 and has and will always be the case. As a result, you need to find profitable locations to invest in. The best way to do that is to use a heatmap, such as Mashvisor’s. Mashvisor’s real estate heatmap conducts a neighborhood analysis at the click of a mouse. The heatmap color-codes areas, showing investors the best places to buy rental property based on metrics like listing price, rental income, cash on cash return, and Airbnb occupancy rate. Above all, Mashvisor’s heatmap analysis tool is a must-have when buying your first rental property.
6. Consider Out-Of-State Real Estate Investing
While staying close to home does work in real estate, consider investing out-of-state. You might find a more profitable and/or affordable rental market elsewhere, and that would definitely be worth it for the high ROI. Just be sure to conduct a real estate market analysis. If you’re concerned about the unknown variables in other rental markets, don’t worry. Mashvisor’s heatmap, as previously explained, is all you need.
7. Look for These Features in Neighborhoods
Not all areas are created equal. Some are more appealing for potential tenants, making them better for you when buying your first rental property. The best neighborhoods to invest in have the following characteristics in common:
- A strong job market
- Good school district
- Low crime rate
- Proximity to public transit, parks, malls, restaurants, and other amenities
8. Use Online Tools to Find a Good Rental Property
Just as not all neighborhoods are good for investment, not all investment properties should be used as rentals. You don’t want to waste time and money on a property that isn’t guaranteed to make a profit, especially when buying your first rental property. As a result, you will need to conduct a rental property analysis. And the best way to do this is with online real estate investment tools.
Once again, Mashvisor is here to help! Mashvisor’s rental property calculator conducts a property analysis for any MLS or off market property in the US housing market. The interactive calculator provides the following data:
- Traditional and Airbnb rental income
- Estimated rental property expenses
- Traditional and Airbnb cash flow
- Traditional and Airbnb cash on cash return/cap rate
- Airbnb occupancy rate
- Optimal rental strategy
- Rental comps
Related: Mashvisor’s Rental Property Calculator: A Guide for Beginner Real Estate Investors
9. Make Sure the Property Is Rent-Ready Upon Purchase
It’s easy to be tempted by a fixer-upper. However, it isn’t a good idea for novice real estate investors to go after such properties. To put it simply, these properties carry too much risk and can lead to extensive and costly renovations. There’s no need to complicate matters with your first property. In addition, rent-ready properties will be cash flow properties right after you close and as soon as you can find a tenant.
10. Consider Buying a Single-Family Home
You can’t go wrong with single-family homes when buying your first rental property. These investment properties are always in high demand and aren’t too difficult to manage. Due to these factors, single-family homes are a good choice for beginners looking for consistent cash flow and a good return on investment.
11. Consider House Hacking a Multi-Family Home
It’s advised that new real estate investors steer clear of large multi-family homes, such as apartment complexes. Small multi-family properties, such as duplexes and triplexes, however, can be excellent investments. This is particularly true if you use an FHA loan, with a down payment as low as 3%, to finance the purchase. However, this comes with the caveat that the property must be used as your primary residence for a set time. So, what you can do is house hack the property. In other words, live in one unit and rent out the others. By doing this, you’re essentially living for free while also making a profit. That’s quite a bargain for buying your first rental property!
Related: What Is House Hacking? How Can I Make It Work For Me?
12. Beware of Local Rental Regulations
When buying your first rental property, you need to understand your area’s rental regulations. This includes laws and regulations for property registration, tenant security deposits, evictions, rent control, and more. By learning your local laws, you’ll avoid legal squabbles and ensure a successful real estate business.
13. Consider a Vacation Rental Property
If you want to buy rental property, you aren’t restricted to traditional rentals. Why not buy a vacation home and use it as an Airbnb? Since Airbnbs operate on a nightly basis, you can earn more through Airbnb real estate investing.
14. Beware of Short-Term Rental Regulations
Like traditional rentals, Airbnb properties are regulated by certain rules and you need to be aware of them when buying your first rental property to use as a short-term rental. You can learn about Airbnb regulations here, but be sure to know your area’s exact legal stance on Airbnb. While some locales might only differ in occupancy tax rates, others might ban Airbnb altogether.
15. Use Mashvisor!
The last tip for buying your first rental property is to use Mashvisor! We’ve already introduced you to a few of Mashvisor’s real estate investment tools. But signing up will give you access to even more tools that will aid you in the process of finding a location and property to invest in. With its big data and predictive analytics, Mashvisor’s real estate software is a must-have! CLICK HERE to start a FREE trial today!