Investing in real estate is considered one of the safest and best retirement plans anyone can partake. Unlike stocks, Real estate is a physical asset. Historically, real estate has shown to appreciate, meaning the value of the asset goes up. Like with any investment, we highly recommend you do your homework before dumping thousands of dollars into it. This article will give our 8 tips you should look for before buying your first rental property.
- Investing in rentals is a long-term investment plan.
- The upfront cost to get into real estate is high, usually requiring the buyer to bring 20% down.
- If you’re not cut out to be a landlord, hire a property management company to handle the day-to-day operations of your rental.
- At least have 10% in capital reserves in case you have vacancies.
Ensure you have enough for a down payment
You will need to bring at least 20% down if you hope to take out a loan for your rental. You may have paid as low as 3% for your home, but mortgages for that don’t exist for investments. You may be able to get around that rule, but if you plan on hiring a property management company, you may not even cash flow anything if you pay less than 20% down. Make sure to do the math and ensure everything checks out.
Should you finance or buy it straight out?
Should you take out a loan or pay it all in cash? This question depends on your investment goals. If your looking to own just one or two properties and don’t want a loan, then paying in cash is the way to go.
If you’re looking to purchase multiple homes quickly, then we recommend leveraging your money to take out numerous loans to buy multiple homes. View the examples below:
Buying cash with $100,000 in hand
You see a great investment property for $100,000, and you decide to pay it all in cash. After rent, taxes, and repairs, you are now cash-flowing 9.5% annual return. Not bad for a $100,000 investment.
Loans with $100,000 in hand
You see the same home, but you decide to leverage your money and take out loans. You take a loan out for $80,000, meaning you bring $20,000 of your own money to the table. You now have $80,000 to purchase more homes. If we use all our money and purchase four more $100,000 homes, we can technically buy up to 5 houses, bringing just 20% down on each purchase. Since you paid less as well, your annual return for each home will be significantly higher.
Ask yourself if you want to be a landlord.
Being a landlord can be exhausting, especially if you have multiple rentals. Tenants will call you about repairs needed around the house, and if you don’t know how to do those repairs, you will find yourself being a general contractor, hiring other companies to fix these issues.
If you don’t have the time to deal with tenants, consider hiring a property manager. They handle the day-to-day operations of your rental for a fee per month.
Location, Location, Location
The last thing you want to do is purchase a rental in a declining neighborhood in your town. While you can find great deals in sketchy parts of town, your maintenance bill will typically be higher.
We recommend buying rentals in good school districts and places with many amenities like restaurants, stores, and parks. If you don’t have much experience, try working with a real estate agent who has plenty of knowledge of neighborhoods around your area.
Investment loans have higher interest rates.
Unlike your traditional mortgage, investments loans have their own set of interest rates. If you decide to take a loan out for a property, we recommend shopping around different lenders. Each will quote you differently.
Your credit score gets pulled every time you get a quote from a lender. You have, on average, a 14-day window to get as many quotes as you want and have it count as one pull.
Try local lenders first.
If you have an older property and want a bit of peace of mind, look into purchasing landlord insurance on top of home insurance. This type of insurance typically protects against property damage, loss of rental income, and liability.
Avoid distressed homes
If this is your first property, we recommend avoiding fixer-uppers. You’ll probably pay too much to renovate unless you find a contractor that does excellent work on the cheap or you have the know-how to do large-scale home upgrades. Rather than that, seek out a home priced below market value that requires little to no repairs.
Expect unwanted cost
You may go several months without having to pay someone to fix anything, but mother nature has a way of ruining even the best-laid plans. You will need to replace the roof, windows, and siding if a storm forces you to do so. Winter, because of all the snow and ice, you may encounter burst pipes, flooding rooms, and damaging the floor. Older houses have a greater likelihood of experiencing an AC unit failure. Always have at least 10% in reserves so that problems are quickly handled.
Always be realistic about investments. Just like with anything, real estate isn’t a get-rich overnight. Setbacks happen, your cash flow may not be great at the start, but if you stick with it, you will have a solid retirement plan, sipping your favorite beverage on the beach in 20+ years.