Beginner’s Guide for Buying a Rental Property

property investment

Some of the wealthiest people on the planet earned their fortunes thanks to real estate. While purchasing a rental property is a sound investment, it by no means comes without any risk involved. If you think you can decide between buying a house or apartment overnight, you can’t be more wrong. There are so many things and aspects to consider and you should have them all covered before making the first move.

We have thus created a nice little beginner’s guide for anyone who might be interested in the real estate business. In doing that we have asked for the support of the traders and financial analysts at who, for once, have focused their attention on the house market, that is, after all always a bit of a gamble! As you are about to see, it is all fun and games until you run into the first obstacle and it will come sooner than you believe.

1 – You need to have what it takes to be a landlord

You are wrong if you believe that anyone can be a landlord. If you do not have enough money to hire a property manager or constantly pay for regular repairs, you should really know your way around a toolbox. This is a beginner’s guide so we will assume that you are keen to save money in the earliest days of your real estate career. That’s why you need to be handy. You need to be able to unclog a toilet or fix drywall. You don’t want to spend precious money on contractors, cleaners, and other handymen. If you are not quite handy, there is a high chance this niche is not quite for you.

2 – Do not buy properties if you already have debts

This should be self-explanatory. If you have any debts to pay, you should by no means get yourself into this business. Many people believe they would collect the needed money by purchasing a house and then renting it, so they can pay their existing debts, but such an approach cannot be more dangerous. Instead, it would be good to have a money cushion behind to cover your unexpected expenses.

3 – Location plays a massive role

Choosing the right location for your property is such a game-changer in this business. Just look at it this way – Would you like to stay at an apartment located miles away from the beach or the center of the city? You clearly don’t. The same is true for all people. This is why it is essential to purchase a property in a city with a strong revitalization plan where the population is constantly growing. More important parameters include the proximity of movie theaters, parks, restaurants, malls, school districts, and other amenities. Also, you do not want to buy a property in a neighborhood with a high crime rate.

4 – Pay attention to interest rates

Realistically speaking, most of us do not have the initial capital to invest in purchasing a house. Where will you find $100,000 or $200,000 to spend in one take? This is why most first-time investors turn to banks and ask them for help. In present times, the costs of borrowing cash from banks are fairly cheap. However, you need to be more than careful when it comes to interest rates. The rates on an investment property are generally higher than the rates for a traditional mortgage.

5 – Make accurate plans by counting your margins

Before hopping into the party train, you want to have your own insurance based on the work you’ve done on settling your plans. You thus want to consider all possible costs to be able to calculate your margins and see where you would stand at the end of the year profit-wise. Maintenance will usually take 1% of the property value off you in one year. Then you have the costs of property taxes, homeowners’ association fees and insurance, landscaping, repairs, pest control, etc.  It’s important to speak to a pest control expert if you have any signs of pests in the house. If you are happy with the estimated profit after all these expenses, you are good to begin the adventure.

6 – Always take the landlord insurance

The first thing you want to do with your recently acquired property is to protect it. You never know what kind of misfortunes may hit you and you want to keep your latest investment safe from any kind of damage (floods, fires, earthquakes, thefts, etc.). This is where the landlord insurance comes into play.

7 – Take unexpected costs into consideration

You have to accept that you will by no means have 100% of your rental income. Besides regular maintenance and upkeep expenses, you need to factor in the unexpected costs. Burst pipes can cause devastating consequences to your kitchen floor, a hurricane can destroy your roof, your fridge may just stop working all of a sudden, etc. This is why you need to accept the fact of losing up to 30% of your rental profit for these expenses that would pay for timely fixes.

8 – Beware of bargain prices

If you are new in the business, you will certainly be tempted to purchase a property you believe is cheaper than the others. In theory, it is great to run into such. However, the reality is somewhat different as you will usually need to spend too much money on renovating this fixer-upper. It is a different story if you have a deal with a high-quality contractor who is ready to give you a hand and help you transform the house into a rental property.

9 – Figure your return

Last but not least, you want to determine your return. Yes, we have learned that it is a challenging task with all of the aforementioned unexpected expenses, but you can still have a rough estimation of what you can expect from your new rental investment. In regards to this, you are particularly looking at the return for every dollar you invest. Let’s say that bonds can offer a 4.5% return, while stocks may pay 7.5%. If you are looking at a return significantly lower than this, you should reconsider your business strategy. On a positive note, a 6% return in your inaugural year is considered a decent deal, particularly if we know that the percentage should rise over time.




Written by Julie Hanson

Julie is passionate about property – development, investment and portfolio planning. Along with husband Alec, Julie is actively building a property portfolio while helping others to do the same.

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