Have you thought about owning an investment property, but don’t know where to start? You may want to add real estate to your investment portfolio. Maybe you have some extra cash you want to put into a rental property. Or maybe you just want to get started because you know real estate appreciates over time. There are lots of things to consider before jumping in, and we are going to cover five important items.
- What type of property is best for an investment property? Almost any property can serve as an investment property/rental. As a beginner investor, you may want to look for properties that are in good condition, unless you are handy with repairs and have extra cash. Smaller, less expensive properties are also good starter properties because you need less money to purchase them. Depending on the location, you may want to look for one, two, or three bedroom properties. Is it in an area where young professionals work? Is it an area where young families live? Condition, size, and location are all elements to keep in mind. Is the property ready to go, or will you need to make improvements? Is the size, number of bedrooms, and parking all appropriate for a good rental? Is the location desirable?
- How do I figure out if the property cash flows? A property cash flows when you make more money than you are paying for the property. Let’s say your monthly mortgage payment is $1500, but you can rent the home for $1800. The property is cash flowing $300 a month. You will need a cost estimate or fee sheet to showing your monthly payment for a property (with principal, interest, taxes, and insurance figured in). Your realtor or lender can provide this. Your realtor can also help you know market rents so you can estimate how much the property will cash flow. Keep in mind that if you don’t have a “maintenance fund” already, you will want to save most of this at first until you have a nest egg built up.
- How do I get financing? How much money do I need? First, check with several lenders to see who has the best rates for an investment property. Most require a 15%-25% down payment as a minimum. Then there are closing costs on top of this, including title insurance and lender escrows. (Again, a fee sheet will show total closing costs.) The lender will look at your income and expenses to see if you can qualify to purchase a rental property. They will consider the monthly rental amount and how much you have in reserves. The overall amount needed to close depends on the purchase price and interest rate, but figure $40,000 plus. TIP: Don’t have that much? Talk to me about using your first home as a rental property then purchasing another primary home for less down and a better interest rate.
- Now that I bought my first investment property, how do I fill it with tenants? Once you have your property, you will want to get it filled as quickly as possible. Make sure all repairs are done, lightbulbs work, and you’ve filed with the town for your rental license. Take great photos and advertise online using Zillow rentals, Craigslist, and FB Marketplace. Use an online service for rental applications that screens your potential tenants with credit and background checks. You will need to set up appointments to show potential tenants or hold an open house. Have them fill out an application. Follow up by calling employers and references. Then it’s up to you to choose!
- Do I manage the property or hire someone? Was everything in step 4 overwhelming? You may want to hire a property management company to help you. There are a variety of services available from just filling the property when it’s vacant, to complete management of rent collection and repairs, etc. It depends on how much time you have and how much involvement you want. Do you want to call a repairman, keep an expense sheet, and collect the rent? Or would you rather pay a fee and be hands off?
As you purchase your first investment property, it’s important to work with an experienced realtor. Ask the realtor if he/she owns rental property, if they can run estimated costs sheets, and if they have lenders they can recommend. Your realtor can also help you make sure the property is rentable (no restrictive zoning or HOA), and help you find out rental codes for the area.
Although purchasing a rental property can be both exciting and scary, in the long run you gain market value, equity, and rent increases. You have to know if it’s for you. Not everyone is cut out to be a real estate investor. Contact me to learn more!
By Launch Kits