Thinking of purchasing your first investment property? As you've probably discovered, there's a lot to take into consideration before making such a purchase. Read on for our tips.
Note: These tips are only for "buy and hold" investments, meaning you plan to hold onto a property as a rental vs. selling or flipping it.
1. Finding the right property
First things first: Not every house will make a good rental. The first thing you'll want to consider is the property location: proximity to colleges, large workplaces and/or mass transportation is often a great starting point. Look for areas that are on the rise (even if you have to pay a higher purchase price), because it's much easier finding renters in places people want to live. Then, do homework on the area to learn the average rental rate. That will start to give you an idea of how much income you can make on a property.
Once you've found the property, you need to understand the financing. When it comes to financing an investment property, you have options. Traditional financing usually requires a 20% down payment. You can use FHA financing (3.5% down), but you'd have to occupy part of the residence to qualify. Think of this option if you're considering purchasing a duplex, triplex or 4-plex. Other financing options include hard money, private money, seller financing or a partnership.
3. Calculating rent and income
As this is an investment opportunity, you'll want to calculate what to charge renters so you know the income that will be generated by renting out the property. The monthly revenue you take in should exceed monthly expenses such as mortgage payments, interest, taxes, HOA fees, maintenance costs and property management fees, if applicable. You'll also want to take into consideration the area your property is located in and other rental properties in the area in order to attract the renters you want.
4. Upgrading the property
It's very uncommon to purchase a move-in-ready property that is also good for rental purposes. You'll likely have to make improvements/upgrades to it. A few almost guaranteed updates you'll have to make are upgrading the flooring and paint. Kitchen and bathrooms are the next most common. You might think, "If I'm renting this property out, why would I want to upgrade it?" Because rental amounts can increase as much as 30% if you upgrade the property - that's why! When making upgrades, choose materials that are cost-effective but durable so they stand up to wear and tear.
5. Managing the property
Even though you aren't living in this property, it will still need management. If you live far away from the rental, don't have experience in home maintenance, don't have the time to manage it yourself, only have 1-2 units, or have a low-maintenance property, it might make sense to hire a property management company. Management companies often charge 10% of the monthly rent, which is used towards collecting rent, fixing defects and responding to tenant complaints.
6. Preparation to rent
Finally, you're ready to rent your property! Make sure you find a quality lease agreement online that you can copy or hire a lawyer to draft a new one for you. And when it comes to finances, keep 3-6 months' worth of reserves for maintenance costs and unoccupied times.
Ready to start your search for the investment property that's right for you? Let's chat! Contact us to get started.