Investing in a rental property for sale is an excellent great way to create a consistent income stream and build wealth in the long term.
According to recent statistics, there are about 43.3 million households renting in the US. The said figure is up from 34.6 million before the Great Recession. Between 2016 and 2021, the US rental market grew by just 0.2%. In addition, up to $485 billion goes to rent every year.
Purchasing a rental property is one of the biggest decisions most people make in their lifetime. Though it might take a little bit of time and effort, it’s also a bit intimidating while starting. Also, it requires you to dedicate a significant amount of your time and effort. You need to understand important real estate basics such as how to invest in real estate, locate the ideal investment property, access financing, and find good tenants.
Note that “investment property” here means a property meant to rent out to generate rental income. While purchasing your first investment property is almost similar to buying your primary residence, there are a few factors that you must consider.
In today’s article, we look at such factors and other insider tips to help make the process relatively problem-free.
Table of Contents
- Is Buying an Investment Property the Right Choice?
- Tips for Buying a Rental Property for Sale
- Bottom Line
Learn about the top 10 tips for buying a rental property below.
Is Buying an Investment Property the Right Choice?
Before we get to the factors that you must consider when thinking of buying a rental property for sale, you must first answer the above question. You need to know whether it is the right investment for you. After all, there are many ways of making money in real estate.
Firstly, are you ready to embrace the amount of work and effort needed to carry out landlord activities? While most people classify rental investment income as “passive,” there’s quite an active involvement needed. Even if you decide to outsource the tasks and responsibilities to a property management agency, you’ll still be required to oversee your investment.
For example, you’re required to approve certain repairs, maintenance tasks, and property improvements and renovations. Also, you must regularly go through monthly and annual financial statements, such as the income statement and net profit report.
Secondly, are you ready to deal with the tenants? Tenants can make or break your investment. If you stick with bad tenants who don’t pay the rent on time, your rental income becomes almost non-existent. It proves that an investment property may come with a higher risk than other investments, say the stock market.
Though you may give your all during the tenant screening process, you still risk ending up with a bad tenant. Remember that if you decide to evict the tenant, the eviction process and costs involved may completely eat up your potential returns and overall profits. The eviction process is time-consuming, too.
It is not to paint rental investments in a bad light. We just wanted to shine a spotlight on the risks involved. On the other hand, the gamble you take by investing in rental property comes with huge returns. The upsides, such as property value appreciation and tax benefits, are unmatched.
Tips for Buying a Rental Property for Sale
If you’ve decided that being a landlord is actually worth it, it’s now time to find rental property for sale near me and invest your money. The following 10 tips will kickstart your investment on the right note.
1. Assemble a Team to Work With
“If you want to walk fast, walk alone. If you want to walk far, walk together.”
Whether you’re a new or experienced real estate investor, you need to work with a team. Surround yourself with seasoned professionals who will walk with you in your investing journey. Why is it important?
Investing in a rental property is entirely different from buying a primary home. You want to walk with people who will help you with the process involved while securing financing, finding your ideal rental property for sale, and closing the deal. Ensure that the people you choose to work with know what they are doing.
Real estate professionals to work with include a local real estate agent, broker, real estate attorney, home inspector, insurance agent, appraiser, and many others. Essentially, your real estate agent can be the source of all other professionals because of their extensive network.
Mashvisor Real Estate Agent Directory is an excellent place to start your search for a real estate agent. On the platform, you’ll find essential agent details, such as license number, real estate experience, agent’s specialties, and reviews from other clients who’ve worked with them before.
As a real estate investor, you’re only as good as the team you surround yourself with.
2. Repay Your Personal Debts
Many experienced real estate investors use debt as part of their rental investment strategy. However, if you’re just starting out with little to no experience, we recommend you avoid it. If you got any unpaid medical bills or student loans, or dependents joining college soon, you might want to reconsider your investment strategy.
Can you still invest in condos for sale if you still face unpaid debts? The answer is yes. Just calculate whether the return on investment you’ll get from your rental property is higher than the cost of debt. If it’s greater, then you may proceed with the investment. (If you’re wondering how to calculate the return on investment, we’ll get to that in a few).
The key here is to avoid putting yourself in a tough position where you’re unable to make payments for your debts.
3. Decide What You Want to Buy
Before going further down the rental property investment process, it’s essential that you nail down your investment goals. They will help guide your investing process.
Before deciding what you should buy, there are a few factors to consider. For example, while multi-family properties can generate more cash flow, single-family homes, especially those in hot markets, tend to offer more appreciation potential.
Note that when we talk of multi-family residential homes, we mean properties with two to four units. Properties with more than five units may require you to get commercial financing, which we don’t recommend for beginners.
4. Secure the Down Payment
Financing a rental property for sale works differently than that for a primary residence. For starters, you need a larger down payment. The interest rates and lender fees are also higher. Similarly, the approval process is more stringent.
For example, you’ll need to secure a 20% down payment when purchasing a rental property. You’ll only need 3% when buying your primary residence. It is because there is no mortgage insurance for rental properties. However, you can acquire the down payment through bank financing, such as taking a personal loan.
5. Buying With Cash vs. Financing
So, should you buy your rental property with cash or get financing? Again, it depends on your financing goals. There’s no one-size-fits-all answer.
Paying for the property using cash can help you generate positive monthly revenue. Let’s say you buy the property for $100,000. If you remove the property expenses, such as taxes, and property depreciation, you could expect annual revenue of $9,500. It is equivalent to an annual return of 9.5% on an initial investment of $100,000.
Financing, on the other hand, gets you a greater return. Let’s say you put 20% as the downpayment and get a mortgage with a 4% compounding rate. If you take out the property expenses and operating costs, the earnings would be about $5,580 annually. While the cash flow is lower, the annual return is 27.9% on the initial investment of $20,000. It is much higher than the 9.5% the cash buyer gets.
While financing gets you a higher return, remember we mentioned that the requirements are more stringent. Here’s a general breakdown of some of these requirements:
- While it’s possible to purchase apartment buildings for sale with lower credit, you may need a credit score of 720 if you want to get the best loan terms.
- You’ll need to provide borrower documents, such as proof of income, bank statements, and copies of tax returns.
- If the periodic income is less or property expenses are higher than projected, lenders may require you to provide a reserve account holding up to six months of mortgage payments.
Though you need to jump through many hoops while securing financing for your rental property investment, the good news is that there are many options available for you to choose from. Read our guide on the best types of loans for rental property investors.
6. Decide Where You Want to Buy
Your rental property’s geographical location is also important. No investor wants to be left with an investment property that’s stuck in a declining neighborhood rather than one that’s stable or growing fast.
Areas or neighborhoods whose populations are growing present excellent investment opportunities. You may also want to check out areas with revitalization plans. Primarily, you can look for the following location features:
- A great school district
- Low property taxes
- Amenities, such as restaurants, walking trails, parks, shopping facilities, and coffee shops
Besides, don’t forget basics such as access to public transportation, low crime rates, and a growing job market. The said factors assure you of a large pool of renters to choose from.
If it seems like a tough nut to crack, worry not since Mashvisor also provides a comprehensive guide on the topic.
7. Calculate the Cash Flow
As a real estate investor looking to purchase a rental property for sale, one of the best concepts you can understand is cash flow. Why? Because some investors buy into what seems like a good deal for a rental property. However, they soon realize that their operating costs and ownership expenses are higher than their rental income. In such a case, your bank account is drained to negative.
You want to understand whether the property you’re interested in can realistically generate positive cash flow when you buy it. We use realistically here since it doesn’t simply mean subtracting your monthly mortgage payment from your rental earnings and getting a positive number. It would be unrealistic since it just indicates that you’ll generate a positive cash flow when things are running perfectly.
In the real world, your property will experience vacancies sometimes, and you’ll also need to settle maintenance fees. They are some of the factors that you must consider when calculating your cash flow.
Listed below are the steps you need to follow when calculating your cash flow:
- Estimate your annual rental income.
- Estimate your annual operating expenses, including property repairs, management costs, taxes, and insurance.
- Subtract expenses from your annual income.
- Calculate down payment plus other upfront expenses (such as required repairs).
- Divide annual cash flow by the total amount of cash invested.
For example, let’s assume that you want to acquire an apartment complex for sale that will generate $2500 per month. Your mortgage payment is $1,200, while your property management agency levies a fee of 10% on the collected rent. If you set aside 15% of your rental income for vacancies and maintenance, the following is what your cash flow calculations will look like:
Rent Collected = $2,500
Mortgage Payment = $1,200
Property Management = $250
Vacancy and Maintenance Allowance = $300
Total Expenses = $1,750
Cash Flow (Rent Collected – Total Expenses) = $750
Mashvisor Rental Property Calculator
If done manually, carrying out the calculations we’ve described above can be an uphill task. Besides, smart real estate investors use various software and online tools to help them with their daily tasks.
Mashvisor Rental Property Calculator is an online real estate tool where investors input basic property information, such as purchase price, cash investment, and financing method. The tool then calculates the crucial numbers, such as cap rate and cash on cash return, for you to decide whether investing in the property makes financial sense or not. In short, the tool helps you make smart investment decisions based on a property’s cash flow.
Our calculator adds convenience to the mix since you can carry out the entire process in just a matter of minutes. You don’t need to spend days upon days gathering hordes of data and organizing it on spreadsheets.
Real estate investors who’ve used Mashvisor’s calculator praise it for its accuracy. With such an important calculation, you don’t want to make wrong investment decisions simply because you got one number wrong. Our tool uses both traditional and predictive analytics together with comparative and historical data to provide you with accurate results.
Sign up for the Mashvisor trial now and access the best rental property calculator.
8. Decide Whether to Hire a Property Manager
Taking up landlord responsibilities can be more time and energy-consuming than it may appear. Managing your rental property by yourself means you need to screen tenants, collect rental payments, and schedule repairs and maintenance. Alternatively, you can hire a property management agency to carry out the said tasks for you.
However, keep in mind that property managers charge between 8% and 10% of the rent collected. The fee can be a major downside, especially when your cash flow isn’t huge. It can eat up a significant chunk of your profit margins.
It isn’t to say that hiring a property manager isn’t worth it. After all, it allows you to benefit from their industry expertise and free up the in-tray on your desk. Your property manager will help you:
- Understand the local rental market well
- Set the right rental rates
- Market your rental property to prospective tenants
- Show the property to prospective tenants
- Screen tenants by carrying out background and credit checks
- Collect rent
- Handle late payments
- Take care of maintenance issues and tenant complaints
- Schedule repairs
- Pay property expenses, such as taxes, insurance, and utilities
How Can I Establish Whether to Hire a Property Manager or Not?
If you feel stuck on whether to hire a property manager or not, here are a few questions that can guide you:
- Am I ready to manage the property myself? If you work in a full-time job, it’s likely that you won’t find the time and energy to take up the property management tasks, especially if you own multiple properties.
- Can I deal with tenants? You might be good at screening potential tenants. However, you need to realize that you must also handle late rent payments, unreasonable tenants, and even evictions.
- Is the rental property close to my home? If your rental is a considerable distance away from your primary residence, it’ll be harder to handle urgent and routine issues.
- What is my rental strategy? If you’re pursuing the traditional long-term rental strategy, it might be easier to self-manage since you’re only dealing with one tenant per property at a time. On the other hand, you might need to hire a property manager if you’re following the short-term rental strategy. It is because you’ll be dealing with many different tenants, meaning there might be many complaints and maintenance issues.
As you can already tell, hiring a property manager can totally be worth it. If you feel you have the time and energy to self-manage, just give it a try. However, we recommend you get a property manager for the daily management tasks.
9. Invest in Insurance
There are some risks that come with being a rental property owner. One of them is accidents. To protect your investment, you need to take both homeowners’ insurance and landlord insurance policies.
Homeowners and landlord insurance are quite similar as they provide coverage for property damage during unforeseen events. However, homeowners’ insurance doesn’t just cover your home, but also your personal property, and medical and legal payments to take care of people injured in your home.
Homeowners’ insurance may only be sufficient when you’re not renting out the property. If you want to rent out the property for an extended period, a landlord’s insurance will cover you in ways the homeowners’ insurance doesn’t. In short, we recommend homeowners’ insurance if it’s your primary residence you’re insuring and landlord’s insurance if you’re renting out the property for a long time.
Landlord insurance offers more protection for rental property owners, including loss of income coverage in case a covered loss pushes your tenant to move out. You won’t find similar coverage in homeowners’ insurance.
10. Find the Rental Property for Sale
If you’ve followed all the steps we’ve described to the letter, you may be ready to look for the rental property for sale near me. There are a lot of online platforms that you can use for your property search. Unfortunately, most of the listings on the platforms are for investors looking for primary residences.
That’s why most modern investors looking for rental property for sale start their search on Mashvisor’s Property Finder. The tool utilizes AI and machine-learning algorithms to help you find investment properties based on your previous search history and other personalized factors. The best thing is that you can do all this in just a matter of minutes.
You can use the following filters to find listings that match your criteria:
- Rental strategy (Traditional or vacation rental strategy)
- Number of bedrooms and bathrooms
Once you’ve set the filters, the tool shows you the most profitable listings in the location of your choice. You can even search for properties in more than one housing market simultaneously. For example, you can find rental property for sale in Florida and Georgia at the same time.
Even on a small scale, real estate investing’s turned many investors into millionaires over the years. It remains a sure way of building your personal cash flow and wealth. Though it may be exciting at first, you need to be realistic with your expectations. Don’t expect to make huge returns overnight. Also, picking the wrong rental property for sale is a grave mistake that could cost you your business.
The best way to avoid making business mistakes is by using Mashvisor tools. Our tools were developed with the smart real estate investor in mind and are meant to empower you in your investment journey. If you want to learn more about what our tools can do for your business, book a demo today.