Buying a rental property is largely similar to buying a residential property. However, some important differences do exist. Although there is no complete guide on how to buy a rental property, below are the main steps which you need to follow once you have made the decision to buy an investment property.
1. Do your homework.
Buying a rental property can be as exciting as buying your own home, but that doesn’t mean that you should rush before you have done proper research. Though you don’t need to be an expert in real estate investments or even in real estate, you have to do your homework properly. Start answering some simple questions to determine the best investment property for you:
- What kind of investment property do you want to buy? If it’s your first time buying a rental property, start small and simple. Look for an apartment, a duplex, or a small apartment building. Buying a large income property sounds tempting because of the expected higher profits, but it is also more costly and will require more work. Remember to not overwhelm yourself by starting bigger than you can manage or afford. Real estate investing is to a large extent learning-by-doing. After you have learnt the basics of it and have started making profit, you can think about expanding your rental property business by either replacing your first rental property with a bigger one or buying a second investment property.
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- Which cities and which neighborhoods do you want to buy your first investment property in? Identify the best places to buy rental property. Choose carefully the area in which you would like to buy an income property. Is it attractive for tenants? Is there demand? How is the infrastructure around? Is it getting overcrowded? What are average prices? Are prices on the rise? Mashvisor can help you find the top neighborhoods and other important data you need to know before buying a rental property.
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- Once you have settled on a neighborhood, what is the average rent in this area? Again, Mashvisor can provide you with a lot of data on this. The rent that you expect to charge for your income property will be the main determinant of your profit, so you have to know the average rent for this kind of property.
2. Go to the bank.
Since the very beginning, you have to think about financing the rental property which you will be buying. Paying for a rental property is equally as important as finding the right property. Thus, start arranging the financing as soon as you start looking for a potential income property. Talk with your bank about how much you can afford to buy for. This will depend on your startup capital, if any, and the expected rent for the investment property that you will end of buying.
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3. Do the math.
Once you have an idea about the kind of income property you want to invest in and the mortgage you can afford, do some calculations. Don’t throw yourself in real estate investing without doing the proper math first. It seems simple: cash flow equals income minus expenses. Income is the rent that you will charge your tenants for your investment property.
Expenses, however, are more complicated. The most obvious one is the mortgage. Online investment property mortgage calculators can be helpful here. Then, you come to taxes. Remember that property taxes might grow exponentially. Many states offer homeowners exemptions on their primary residence, so property taxes on rental properties are significantly higher. Then, you need to include other less apparent costs such as maintenance. Just like your home, your income property will require maintenance. As soon as you become a landlord, you will start receiving phone calls from your tenants about problems with your property all the time. And you will need to fix them – for a price. The costs will vary majorly depending on whether you are good with tools and can fix most problems by yourself or you need to hire a professional. Also, don’t underestimate the damage that renters can and will do. Mashvisor provides an interactive investment analysis in which expenses and income can be entered. This is a lot faster than creating spreadsheets.
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4. Make a plan.
After you have done some research and thinking, set specific goals and make a plan. It is best to write down your goals and periodically check that you are sticking to them. If you decide to buy a simple family home for $500,000, don’t get tempted by a $600,000 house with a beautiful garden. Remember that investing in rental property is a business and should be treated as such. Be sure to make the decisions that will provide you with the most profitable income property at a price that you can afford.
Probably the best way for a beginner real estate investor to learn is to connect with local investors. Reach out to other already established investors in the areas which you are considering. Successful investors are proud of their achievements and like to brag about them. Learn from their experiences. However, this doesn’t mean overwhelming them with questions and requests. Try to learn a few things from each investor you talk to.
6. Start shopping.
Now comes the exciting part – the shopping for the actual investment property. There are many website which you can use to find listings. Mashvisor offers many in various US cities and neighborhoods. However, these sites don’t usually contain all the information you will need before making your decision. Thus, consider contacting a local real estate agent. Agents are usually paid by the seller, so you don’t have to worry about the cost. It’s important to find a real estate agent who works with investors as this person will be better aware of what makes a good real estate investment rather than a good home. Although a real estate agent can be of indispensable help, he/she can also bring unnecessary pressure to buy a property before you have found the best income property for you.
7. Make an offer.
When you have found the investment property you want to go for and have clarified all necessary details, it is now time to make your offer. Your real estate agent – if you are using one – will fill out the paperwork and submit your offer to the seller. Make sure to only spend an amount that works for you. Don’t let your emotions take over. Once again, remember that this is a business decision, so the numbers have to make sense.
Once you have completed these steps, you are – more or less – ready to enter the world of rental property business.