Purchasing an investment property is not something you should do without consideration. There are a plethora of factors to consider with both the property as well as the resources you have. Not doing your due diligence can lead to a huge loss, which is more probable in real estate investing. Here's what you should consider when purchasing a rental property.
Factors Future Landlords Should Look Into
Location
The rental property's location affects the appeal of your listing. People wouldn't want to live in a home or apartment building too far from necessities and amenities like public transportation, shopping centers, schools, and other important places. Being in a bad neighborhood will also deter tenants from renting your units for the sake of their safety.
Property Condition
You’ll need to pay a sizable down payment to purchase an investment property, and you’ll have to spend more after the sale if the building needs a lot of repairs and renovations. If the property is in bad condition and you leave it as is, you might find it hard to attract tenants based on the curb appeal alone. Conduct thorough inspections first before even considering a purchase.
Rental Market
Before buying a rental property, do your research on the local rental market. A steady rental income will depend on the rental demand of the area, as well as comparable rental properties. It will be difficult to find financing for your real estate investment if the statistics show that it won’t fare well due to the lack of demand or high vacancy rates.
Financing Options
Rental property investing won’t be cheap, which is why you need to evaluate your financing choices. Some of your options include various loan types from the bank, government loans like Fannie Mae and Freddie Mac, and private money lenders. Your chances of getting a loan approved will depend on the income property you intend to buy, as well as personal factors like credit score and expected rental income.
Potential Returns
To determine whether you'll be purchasing a profitable rental property, you shouldn't look at the monthly rental income alone. Expected expenditures like repair and maintenance costs, operating expenses, marketing costs, mortgage payments, and more will all impact your NOI (net operating income). Without a positive cash flow, you might not be able to pay your monthly expenses on time if at all.
Tax Considerations
Property taxes can get complicated, especially if this is your first rental property. It's advisable to consult property managers or tax professionals to learn about the tax implications rental property owners encounter. For instance, there are a plethora of tax deductions you can make such as mortgage interest on your rental real estate investment or property management fees.
Risk Tolerance
Buying a rental property requires careful consideration, especially if you have a low-risk tolerance in real estate investing. You’ll need to consider matters like market fluctuations and unforeseen expenses, not just the property value and closing costs for the rental property. Assess your investment property goals and determine whether they can realistically be achieved.
Property Management
Even if you purchase a rent-ready property, there's still a lot to do as a landlord. Property management calls for marketing your units, screening tenants, handling property maintenance, responding to tenant concerns, and more. For single-family homes, it might be easier to manage day-to-day operations, but self-management for multi-family homes where you oversee more than one tenant can get overwhelming fast.
Exit Strategy
Smart rental property buying includes planning for an exit strategy, which means you have to do your due diligence and research the investment property's potential for appreciation, liquidity, and how it fits into your long-term strategy.
Real Estate Investing FAQS
How much money do I need to get started in real estate investing?
There is no fixed amount for that as it will depend on what kind of property you mean to purchase. Real estate values can also depend on specific factors like its proximity to tourist attractions, its current condition, or the rental demand of the area the property is in.
How to find the most profitable investment for me?
Consulting professionals like real estate agents or property managers is recommended when buying a rental property. They can advise you about the ideal investments you can get based on expertise and data-driven insights. You could use our free ROI calculator to get started on your research to thin out your options.
What are my financing options?
Traditional Mortgages: Conventional loans are mortgages offered by banks and other financial institutions, and while the interest rates might be lower than other options, you usually need a higher credit score to qualify.
Hard Money Loans: These are short-term loans that require less from you, but they will have higher interest rates. It can be an alternative when you cannot obtain traditional loans.
Private Money Lenders: Private money lenders are usually real estate investors as well, but they can also be family or friends. It can be more flexible but may require higher interest rates.
FHA Loans: The loan will be backed by the Federal Housing Administration, and can be more lenient when it comes to credit scores, making them one of the best choices for first-time buyers. Loans from the FHA like Fannie Mae and Freddie Mac loans are typically reserved for multifamily properties.
Seller Financing: You may make a deal with the seller of the property wherein they handle the mortgage process themselves and you pay them monthly to obtain the property.
When should I start expanding my investment portfolio?
You should do so when you're in a comfortable financial situation and can afford to buy more rental properties. You may consult financial advisors and they can assess your readiness based on important factors like the current rental market, availability of profitable investment properties, and your ability to pay a down payment.
Why You Should Hire a Property Management Company
Property management won't be easy if it's your first time purchasing a rental property. Even experienced landlords hire help for the sake of avoiding the stress of the rental business. Companies like CRM Properties can handle the day-to-day operations of the business as you learn the ropes, and you’ll be able to earn passive income as you look into other profitable business opportunities.
You won't even have to commit to hiring one right away! You can schedule a consultation with us for free to determine whether the services we offer can help you on your investment journey.