Investing in a rental property is a great step toward earning passive income and building wealth. Unfortunately, becoming a landlord for the first time can also be challenging and lead to a financial loss if you don't know what you're doing or what potential traps to avoid. Here are five tips for buying your first rental property that will help ensure your success and make the entire process less stressful.
Carefully Research Neighborhoods
The neighborhood where you choose to purchase your first investment home will have a huge impact on the success of your endeavor. Here are a few neighborhood features to keep in mind:
- Look closely at crime rates. Buying in a high-crime area may help you snag a bargain but you need to ask yourself if it's worth it. Areas with a lot of crime may not attract the best quality tenants, and you may find yourself dealing with the hassle and expense of frequent vandalism and break-ins. You will also be limited in how much rent you can reasonably expect to charge.
- Buy in the best neighborhood you can afford. If you are starting off with a small budget, purchasing a rental home in an 'up and coming' neighborhood that shows signs of gentrifying and appreciating in value can be a great opportunity. Just bear in mind that you will need to be patient as it may take years for rent prices in the neighborhood to go up significantly.
- Pay attention to schools in the area. If there are great schools close by, you will attract families who want to rent long-term. On the other hand, if you buy a home near a university you will always have potential renters but will have to deal with frequent tenant turnover and possible damage to your property.
Be Wary of High Vacancy Rates
The key to a successful investment property is to have it rented out continuously. Even if you only charge enough rent to cover your mortgage, property taxes, and related expenses, this is better than owning an investment property that sits empty for long stretches of time. If a high percentage of homes in the area seem to remain vacant for months at a time, chances are yours will as well.
Be Conservative When Estimating Expenses and Profits
It's important to think long-term when buying an investment property. Unless you are buying a home with cash, don't expect it to be profitable until you've paid down your loan quite a bit and built equity. At first, just aim to cover your expenses and always estimate these on the high end just to be safe.
Consider Hiring a Property Manager
Property managers will handle many of the time-consuming tasks involved with being a landlord, all for a small percentage of the monthly rent. They will find and screen tenants for you, run background checks, collect rent, call repair workers and house cleaners, and even perform basic maintenance. Hiring a skilled property manager often saves money in the long run, because it helps avoid costly vacancies and evictions.
Look for a Move-in Ready Home
Unless you have a construction background, make your first foray into real estate investment as easy on yourself as possible by buying a move-in ready home. Look for a home that can easily pass an inspection and is not in need of major repairs or renovations. On the other hand, cosmetic details like paint colors, old carpeting with nice wood floors underneath, and dated fixtures can easily be tackled by a novice without spending a lot of money.
By following these tips, you can move into investment property ownership without regret or worry.