7 Pro Tips for Buying Your First Rental Property Buying your first rental property is a major financial undertaking and can be a lucrative one. In fact, real estate has produced many of the
Jul 31 2018 39927 1
7 Pro Tips for Buying Your First Rental Property
Buying your first rental property is a major financial undertaking and can be a lucrative one. In fact, real estate has produced many of the world’s wealthy people. As such, there are many reasons to believe that property is a sound investment.
However, as with any other investment, it pays to do your homework. That’s why in this article, we are going to share with you 7 pro tips for buying your first rental property.
Tip #1: Make sure it’s for you.
How are you at unclogging a toilet? Or repairing drywall? Do you know your way around a toolbox? Sure, you could hire someone to fix the issues for you, however, that would translate to fewer profits for you.
When you are just starting out as a property owner, your goal should be to save as much money as possible. If you don’t have plenty of cash to spare and you aren’t the handy type, this career may not be suitable for you.
Besides, managing a property requires boatloads of time, more so if it’s your first property.
Tip #2: Find the right location.
Just like with any business, location can have a big impact on your revenue. Buying a rental property in the right location will maximize the chances of its value increasing and generating profitable returns.
So, what is the ideal location for a rental property? Look for an area with a growing job market, a neighborhood with low crime rates, a decent school district, low property taxes and plenty of amenities like restaurants, movie theatres, malls, and parks.
Tip #3: Avoid buying a fixer-upper.
If you are a fan of reality TV, it’s very likely that you’ve seen one happy homeowner transform a troubling home into a dream home. Sure, others may have happy endings. However, for some unlucky souls, the ending may disappoint.
First off, with fixer-uppers, remodeling costs could outweigh the cost savings. At first, you may think that you only need to renovate the kitchen and redo your bathroom. However, later, you may realize that the home also has a foundation problem as well.
Fixer-uppers are also full of surprises. You cannot know what is around those pipes or behind those walls until you open them up and get to work. Also, remodeling a fixer-upper takes time.
If you are not the DIY type of a person, avoid buying a fixer-upper. Get a move-in ready home instead.
Tip #4: Calculate your margins – cash flow is always king!
For every dollar you invest, what is your return on that dollar? Bonds may pay four- and a half percent and stocks may offer a seven-and-a-half percent cash-on-cash return.
To get a good margin, you want to ensure that your rental adheres to the 1% rule. Essentially, the 1% rule requires the rent to be greater or equal to the mortgage payment. This way, in any worse case scenario, you are sure to break even on the property.
As an example, if you paid $200,000 for the property and following the 1% rule, you must generate $2,000 per month in rent. With this calculation, you should be able to determine whether the investment is safe and profitable.
Tip #5: Calculate operating expenses.
Generally speaking, operating expenses will be anywhere between 35% and 80% of your gross operating income. Ideally, your operating expenses should adhere to the 50% rule.
According to the rule, the total expenses associated with operating an SFH investment should be about 50% of the gross rents. For instance, if you charge $2,000 as rent, then expect to pay $1,000 in operating expenses.
Examples of operating expenses include property taxes, maintenance costs, property management fees, and mortgage payments.
Tip #6: Consider hiring a property manager.
As your first rental property, it’s likely you don’t know the ins and outs of property management. With a property manager, you can rest assured that he or she will handle everything for you professionally.
For example, they will find the right tenants for you. They will also ensure that the property always remains in a tiptop condition. They will see to it that your property complies with the residential tenancy laws.
For such services, expect to pay approximately 7-10% of your total rental income.
Tip #7: Find good tenants.
It is every landlord’s dream to get good tenants. Good tenants will take care of your property, keep you up to date with any maintenance issues and provide a reliable source of income.
Finding good tenants involves several things. For instance, a good advertising strategy, carefully crafted policies on who you will reject, and good screening tools.
With these tips, you should be ready to start a new career as a real estate tycoon. Remember, though, property investing isn't a competitive sport. Ask for help when necessary. Build relationships. And, learn from those with more experience than you.
Written by Derek Dawson