According to the The United States Census Bureau, there are over 23 million landlords in America. Rental Protection Agency. Many landlords have rental properties as investments, regardless of whether they acquired the property from their heirs or bought it themselves. Some landlords are just starting to make the jump into the lucrative, exciting, frustrating, sometimes frustrating business of owning a rental property. Others are looking to buy their first property.
If you are getting ready to buy your first rental property as a part of your long-term real estate investment plan, it’s important to know where to start.
Why Buy A Rental Property?
Passive income, can you say? If the deal is right, a rental property can be a great investment. We’ll go over those details in a bit. Here are some reasons why renting a property can be one of the most powerful wealth-generating tools.
Consistent Cash Flow
The cash flow you get from renting out your property should be used to pay off the mortgage. Investors choose real estate because they can earn passive income and ongoing income. It is not always possible to have a positive cashflow, but it can often produce good long-term results. Keep in mind, this is the first property you’ll be investing in so it’s important to keep in mind that no process will be perfect, there will be expenses or situations that you just couldn’t plan for.
Appreciation
Renting a property allows you to sell it at a later date. Although, let’s face it, appreciation is never guaranteed, but history has taught us that home values increase more often than not. As a property owner, you can rest assured that your first rental property will be worth it.
Tax Benefits
The tax benefits are amazing! Keep your receipts! Many times, rental property ownership can come with tax benefits. Many times, the IRS allows property owners to deduct items like:
Maintenance and repairs
Taxes and mortgage interest
Depreciation
Travel expenses to properties
How To Finance Your First Rental
It’s important to remember one thing when purchasing a rental, financing. As with anything, we have to remember that a rental property is an investment so it’s important to make smart choices when it comes to initial financing. There are several things to remember.
Credit Scores Matter
Keep in mind a credit score of 720 and higher to ensure the best terms on your loan. Although it’s possible to purchase a property with lower credit, you’ll be better off with that base score.
Don’t Forget About Down Payments
Many people don’t realize that the down payments can range from 20% to 25% of a property’s price.
Credit history is a factor
Lenders will look at your credit history. After all, it’s one of the main reasons why lenders often pull a credit report when you’re applying for a loan. It’s not untypical for lenders to require some sort of payment held in a reserve account for a period of time if the income is less or expenses are higher than expected for the property.
Clear documentation
Get out those filing cabinets! Lenders, for example, want to see past tax returns, proofs of income, and bank statements to determine what they’re getting into. Keep in mind DSCR (also known as debt service coverage rate). This ratio is used for determining how much cash flow is needed to finance payments.
Where To Get Rental Financing
Here are two popular ways to finance your first rental property. You have many options for financing your first rental. Here are some suggestions.
Banks and Credit Unions
It’s very common for an investor to get their first rental property loan from a bank or a credit union. Conforming and conventional loans are two of the most commonly used types of loan. You can also get these loans from a mortgage broker.
Conforming loans must comply with Fannie Mae and Freddie Mac guidelines. It’s true that Fannie and Freddie allow up to 10 mortgages by the same borrower, but banks often set a lower limit of around four loans total.
Private Lenders
Let’s say you have a rental property and an acquaintance who happens to be a real estate investor themselves. They have multiple properties in different locations and are very familiar with real estate. These private investors are experts in the real estate market and can offer tailored loan terms and fees that match the borrower’s experience as well as the deal potential.
It’s not uncommon for some private lenders to take a small equity position in the project and accept future potential profits in exchange for lower fees or interest rates.
Find A Rental Property
So, we’ve gone over all of these financing options, but we haven’t even touched the most important part and that’s finding the actual rental property. Keep your first investment property a single family home, or condo until you gain more experience as a landlord.
Here are some suggestions for where to look when searching for a rental home.
MLS or Real Estate Syndication Sites
This is the most popular place to rent a property. You can take a look at Zillow and other syndication websites. realtor.com. A lot of the times, these are based on the MLS, but sometimes, you can find property’s that are for sale by owner on there too.
Word Of Mouth
Johnny, your next-door neighbor, might be interested selling his property. It’s important to keep your eyes and ears open for any potential opportunities for folks that want to avoid the potential hassle of putting their property on the market. Maybe they don’t want a ton of traffic, maybe they want to sell to someone in the area or maybe they are just kicking around the idea of selling, whatever it is, there are definitely some hidden gems that could be right around the corner.
Local auctions
Never heard of auction.com? Sure it’s one place to look for potential properties, but there are often local auction in counties. Tax auctions are one example. The majority of these auctions forgive the mortgage and the investor is only responsible for the back taxes. Other options include local bank auctions and sheriff sales. It’s important to keep an eye out on your local county or state site for potential opportunities.
What To Find What You Are Looking For in A Rental
So, you’re exploring the market, but have no idea what you should even be looking at before investing. You want to be sure that you make a wise decision before buying your first home. Here are some tips to help you get started.
Average Rent
Find out what the average rent is in the area. Then subtract your estimated monthly expenses to each rental property. This will help you determine if you are making a profit.
Appreciation Value
Find properties to sell that have potential for appreciation. That is, property that you can maintain its value over the years by updating and renovating.
Taxes
Learn more about property taxes, which can vary greatly from one area to the next. We want to make sure to keep in mind the possible rental income that you’re getting from the property just to make sure that you’re not upside down when paying the taxes.
Crime
You should get official information on crime in the area where you live and steer clear of areas that are high-crime or have low police presence.
Top Places To Invest In Rentals
Location location, location. You should look for a good city and town in your area that has a healthy rental market. This could be a college town or a new suburban town. These are some of the top states to invest in. This information was originally discovered on roofstock.com. Find out more about the best places to invest. This article is worth reading.
Dallas, Texas
Home value: $290 564.
1. Year price growth: 20.0%
Median rent: $2,325
1 Year Rent Growth: 16%
1.1% job growth 01%
Population: 1,304,379
Population growth 1-year: -0.1%
10-year population growth: 8.9%
Atlanta, Georgia
Home value: $359.314
1.4% price growth in a year
Median rent: $2,274
1 year rent growth: 23%
2.1% Job growth
Population: 498,715
Population growth 1-year: 1.8%
10-year population growth: 18.7%
Orlando, Florida
Home value: $325.415
1.1% price growth
Median rent: $2,168
1 Year Rent Growth: 24%
Employment growth: 0.1%
Population: 307,573
Population growth 1-year: 0.6%
Population growth 10-year: 29%
Seattle, Washington
Home value: $888.202
Price growth for 1 year: 11.2%
Median rent: $3,100
Rent growth for 1 year: 15%
Employment growth: 1.79%
Population: 3,979,845
Population growth 1-year: 1.0%
10-year population growth: 17.5%
Get ready To Invest?
Investing in real estate While it can be a great way to build wealth, it can also drain your finances and drive yourself crazy. Do not expect to simply sit back and collect rent payments when you own your first rental property. Get to know what it takes for a landlord before you start your new business.
