Overview: Buying Rental Property Guide | Investing in Rental Properties
Investing in rental property can be a significant source of income in the here and now, as well as into your retirement.
If you have the time and ability to manage your properties, buying a rental property can be a great investment strategy providing you know the proper way to do it.
In this overview, we will give you the answers to questions you need to ask before making a rental property investment including:
- How do you know how to buy rental property?
- What are some ways to finance rental investments?
- What are the benefits to rental real estate investing?
Make sure you have a thorough grasp on the advantages and disadvantages of buying rental property before calling your realtor to move forward. We will start with the basics of why you might want to consider investing in rental real estate.
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So You’re Interested in Investing in Rental Real Estate?
When it comes to making investments, there are several different ways to invest in real estate. Popular television shows market flipping houses as the most glamorous way to make money with real estate, but investing in rental property is where the real money comes in to play. Why is buying a rental property the best method of investing?
First, buying rental property and subsequently finding tenants provides a steady source of income. Real estate value rarely increases with age so buying and holding makes little sense compared to the logic behind rental real estate investing.
If the neighborhood improves (or the market does) and you are able to command higher rent from your rental investments, then the appreciation is simply a bonus.
Other individuals prefer to think of investing in rental properties as a new career path. When you invest in rental property, you also tacitly agree to maintain and manage the new properties you own. Depending on how quickly you enter into the world of buying rental properties, this could be a full-time job in and of itself.
Making an investment by buying a rental property can be an excellent way to diversify your portfolio from the average collection of stocks, bonds, and mutual funds. In order to add a little variety, some people like the passive income and the control they can exert over the situation when it comes to investing in rental properties.
Making the decision to buy rental property is not for the faint of heart, but there are good reasons galore for choosing to do so. Whether you’re pursuing financial freedom, preparing for retirement, or looking for a career change, rental property investment might be for you.
To help you get started on the right path with your rental real estate investing, we’re going to take a look at a few tricks of the trade for buying rental property that will make you some extra money.
Tips for Finding Rental Investments
If you’ve been considering buying a rental property for any length of time, you’ve probably also wondered exactly how to invest in rental property. If you need to know how to buy a rental property, we’re here to give some guidance. Take a look at these top four tips for investing in rental property:
- Consider the cost. Buying a rental property isn’t exactly cheap, but you need to make sure you’ve factored in the additional costs that come with owning property. Even though you won’t be living there, you’ll still be responsible for paying the property taxes and possibly any homeowner’s association fees for amenities for your rental property investment.
- Look at the location. You need to make sure that your rental property investment is in a part of town where people would want to live. Check the school district, the crime rates, and the overall atmosphere of the neighborhood itself. While you may be able to find tenants even in a rougher part of town, if you ever decide to sell your rental investments, you’ll want a property that would resell quickly.
- Scour the area for listings. Are there an abnormally high number of vacant properties in the area where you’re considering buying a rental property? If so, it might be a sign that the neighborhood isn’t as great as it appears on the surface, or you might expect a lull in occupancy during the same time frame each year. A gap in occupancy during certain times of the year can lead to a drastic decrease in the income from your rental property investment.
- Find out about the future. Find out from the local municipal planning department what else is zoned to be built in the area near your prospective rental investments. New condominiums, shopping centers, or unattractive buildings could put a dent in the amount of income you can generate from your rental real estate investing.
If you need to know how to invest in rental property, you might want to consider hiring a professional realtor to work alongside you. They can offer valuable insight into which areas are seeing growth, and they may know about new listings that would make the perfect rental investments before they’re advertised on the market.
They can definitely help you along the path to investing in rental property.
How to Finance a Rental Property Investment
Now that you know a few tips and tricks for how to buy a rental property, it’s time to take a closer look at what you might need to do in order to finance your rental property investment. Because you are looking to invest in rental property, this new address won’t be your primary residence.
The bank won’t view your rental property investment quite the same way that they viewed your original mortgage. In fact, you can expect to have a few more necessary items to bring to the table in order to receive financing to buy a rental property.
- Down payment: Private mortgage insurance won’t cover any of your rental investments, so you will likely need to secure a much larger down payment. Plan for approximately 20 percent for traditional financing, though a larger down payment (closer to 25 percent) could get you a better interest rate when it comes time to buy a rental property.
- Credit score: If your credit score is 740 or higher, you have a better chance of qualifying for a lower interest rate on your rental property investment. Rental real estate investing can be lucrative if you’re not paying a small fortune in fees related to the interest on the financing.
- Smaller banks: If your down payment isn’t as large as you want it to be, a smaller or more local financial institution might be more willing to help you with buying a rental property. A mortgage broker could also give you more access to loans well-suited for investing in rental real estate.
How to Buy Rental Property
Now that you know what to look for and how to obtain financing, you’re ready to start buying rental properties. Where do you start? Do you really know how to buy a rental property? The list of next steps for buying a rental property is pretty simple:
- Hire your rental property investment team. This can mean interviewing realtors that are experienced with rental property investment, getting preapproved with your preferred mortgage lender, or hiring a financial advisor who is experienced with investing in rental real estate and different ways to invest in real estate.
- Look at your numbers. Make sure you know how much you can spend when buying rental property and how much you would need to charge in rent to make this investment worthwhile. Investing in rental properties is supposed to help you generate income, so make sure the numbers add up to do so.
- Find a few properties. Asset Rover recommends following a 100/10/3 guideline for looking at properties where you’re considering investing in rental real estate. You will find 100 properties that interest you, 10 that you would invest in a rental property for, and finally, make an offer to purchase 3 of them (but only one at a time).
- Make sure to inspect the property. If you haven’t already, you need to make sure to have any home inspected prior to buying a rental property. You can bring in a property manager to start discussing hard numbers of what to charge for rent in your rental property investment. You should also hire a home inspector to help you to identify potential issues and areas that need repair prior to buying a rental property.
- Go to closing. Once the house is finally yours, it’s time to start searching for tenants that can occupy your new foray into investing in rental properties.
Now you know how to buy a rental property from start to finish. Investing in rental real estate isn’t as difficult as it sounds. Once you’ve made your initial investment buying rental property, it’s time to move on to actually generating an income by finding tenants to occupy your new home.
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How to Find Tenants
Rental property investing is only the first step toward gaining financial security and extra income from your new property. After you finish buying a rental property, you will need to find tenants to help cover the cost of your investment. Here are a few tips for finding good tenants that will hopefully take care of the investment you made by buying a rental property:
- Advertise: You can advertise your property online through sites designed specifically for helping tenants to find new rental properties. Don’t forget about classified ads such as Craigslist or your local newspaper site. In the same way that you found out how to buy a rental property, you can likely advertise your new property for rent.
- Clean: After rental property investing, you need to clean up your purchase before opening it up to renters. You might need just a cursory deep cleaning from the previous owner, or you might need to add a fresh coat of paint. Investing in rental properties can often mean more than simply paying the mortgage. You will need to make investments toward improving the property as well.
- Applications: Investing in rental properties is a huge risk for your own finances, so you want to make sure you find renters who will care for it. Find or create an application to have prospective tenants fill out prior to being considered for the property. You may also want to charge a nonrefundable fee to weed out some tenants.
- Background checks: Consider running a background check on any renters that you would consider entrusting with your rental investments. Even if you opt not to run a background check, you should, at the very least, contact their employer to ensure that there is enough income flowing in to cover the rent.
After investing in rental property, finding good renters is the next biggest hurdle to finding a sustainable source of passive income and diversifying your portfolio.
Of all the different ways to invest in real estate, buying a rental property can definitely be a hassle. However, it is possible to find good renters if you do the legwork prior to entrusting them with your property.
Buying rental property can be overwhelming and confusing as you learn how to invest in rental property. There may be plenty of different ways to invest in real estate, but buying rental property can be a rewarding experience. Simply hire the appropriate professionals, secure financing, and start shopping for your rental property investment.
The process is simpler than some might let on, but there’s no reason to continue waiting to make a major investment or lifestyle change by investing in rental real estate now.
Diversify your portfolio, generate extra income, or create a career change for yourself. No matter what your reason for investing in rental properties, hopefully our comprehensive guide will give you the first steps toward investing in rental real estate.
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