Tips for Buying Your First Residential Investment Property
Buying a first-time rental property can be a challenge. Property buyers who have never invested in residential property in the past have a lot to learn.
It’s important to know how much to put down, which neighborhoods to look in and what financial information to take into account when making a purchase. These tips can help make the process easier, more profitable and less stressful.
This post was written by our content partner Dylan Snyder, Team Leader and Real Estate Consultant of the Synder Group with Keller Williams in Florida.
Know Your Expenses and Expected Profit
Like other properties, rental properties have regular monthly expenses. The annual cost of maintenance for a rental property should be about 1 percent of the cost of the home. When calculating other expenses, factor in the cost of property taxes, mortgage, HOA fees, insurance, utilities (if included) and monthly maintenance costs like pest control companies and landscapers. Property owners should aim for a profit margin of approximately 10 percent, so the monthly rent must accommodate these expenses and produce profit.
Property owners who don’t know how much to anticipate paying in insurance costs and taxes should speak to a professional accountant and insurance agents. Property taxes and insurance rates can be different for a rental property versus an owner-occupied property, so homeowners cannot use their own homes as a base line for calculating expenses.
Avoid a Fixer Upper
Rental properties have a steep learning curve, so the first year of owning a rental property can be challenging. Adding in the complication of buying a fixer upper makes the learning process more stressful than it needs to be. Most homeowner do not know what renters’ preferences are, such as these 4 renovation projects that hurt the value of a home.
A property owner who decides to buy additional rental properties down the road may turn to a fixer upper for a good deal. However, for a first time rental property, property buyers should look for properties that are turn-key. Features to look for include:
- No major cosmetic defects.
- Functioning appliances.
- Healthy lawn.
- No major repairs needed.
Be Prepared to Put Twenty Percent Down
Homeowners who purchased their primary home with an FHA loan may have paid as little as 3.5% for their down payment. It can come as a shock then to find out that mortgage companies often require a full twenty percent down from home buyers purchasing rental property.
Home buyers who want to purchase a rental property must have this money saved before they can start looking for a home to buy.
Onerent wrote a similar article in how to calculate rental property expenses with the 50 percent rule which we recommend taking a look.
Research the Rental Market
The state of the rental market can have a big effect on how profitable a rental home will be, for example, the Greater Los Angeles market has some of the highest rents in the country. Before deciding which home to buy, prospective landlords must first research the rental market in their area. These questions must be answered:
- What is the demand for rental property in the community, and where is demand the greatest?
- How much do renters typically pay for homes in the area?
- What is the value of a typical home in the area?
- What is the state of the economy in the area?
Property buyers who can answer these questions in advance can make a purchase with eyes open and may be able to make their purchase strategically to ensure the highest profit.
Many people who buy residential investment properties maximize their profit by making their own home improvements and repairs. People who have little or no experience making home improvements can benefit from making small home repairs around their house. Getting practice and real-world experience with DIY projects can make owning a rental property more profitable.
Contact A Real Estate Professional
Working with a real estate professional can help make the home buying process easier and less stressful. A good real estate professional can help property buyers identify the best neighborhoods for buying a rental property, and can give the buyer tips and tricks for identifying good rental homes.
For more information about how to purchase a first-time rental property, contacting a professional property management service, such as Onerent, can give you more insight into your home’s rental potential.
If you’re interested, you can also get a free rent estimate with Onerent can see how much your property is worth.