Most new investors realize the benefits of rental property ownership. Just one well performing rental property can completely transform your portfolio. There is nothing wrong with quick flips and rehabs but there should be some balance to your business. A rental property will not only generate monthly cash flow but can offer tax breaks and long term appreciation potential. Buying a rental property is very similar to that of any other purchase except there are a few minor tweaks along the way. Understanding the subtle changes can make all the difference between a home run rental property and one that becomes a burden to deal with. If you are interested in rentals but aren’t quite sure where to start here are five steps to rental property ownership.
- Start With A Plan. Ok, so you want to buy a rental property. The first step is to develop a plan of attack. You can’t just make offers on every new listing that hits the market. You need to determine a firm set of criteria that will act as your guide. Do you have a specific market that you are interested in? How many units are you looking for? How long do you plan on holding the property? What type of capital do you have for improvements or upgrades? You need to know what you want first before you start looking at what is on the market. A property may be great to live in but may not make the best rental property investment. The goal of any rental property is to attract tenants for as long as possible. If the property is located in an area of low demand you will have trouble finding tenants. Before you do anything else you need to visualize what you want from your rental property.
- Understand The Numbers. Owning a rental property is very much like running an individual business inside of a bigger business. Like any other business you need to fully grasp all of the numbers associated. From the outside it may appear that cash flow is simply your rents received minus loan repayment. This is certainly a start but far from the final number. You also need to factor in specific utilities, lawn maintenance, snow removal, vacancy reserves and unexpected repairs. Many times these numbers will throw your monthly bottom line for a loop. A property that would appear to have positive cash flow may actually turn out to be negative when all is said and done. If you are friendly with fellow investors in the area you should reach out to them and ask about specific numbers and variables they face. Certain towns are more difficult, and expensive, to own in over others. Numbers are the backbone of any business and certainly a driving force in any rental property.
- Financing. At this point you may think you are ready to start looking but you first need to secure financing. There are many different ways to finance a rental property. Because of the long term nature of rentals many owners start by searching for traditional bank programs. With these programs you can take advantage of low interest rates but you also need money for the down payment. Depending on the borrower credit profile and the specific lender the down payment amount can be anywhere between 20-25%. Once the closing costs and property tax escrows are thrown in buying a rental property takes a large financial commitment. Another option available is to seek a hard money loan. Generally speaking hard money loans work best for short term flips and rehabs but can work for a rental property in the right situation. Regardless of how you plan on financing it needs to be firmly in place before you make any offer.
- Sit Down With A Real Estate Agent. Rental property success is based on buying the right property. As obvious as this may seem many new landlords fail to acknowledge this. It is difficult not to jump at every new listing you see. You want to get started so badly that you end up pursuing the wrong property. To avoid this you need to sit down with your real estate agent and review your game plan. You should discuss exactly what you are looking for, where you want to buy, how much you can afford and what condition the property should be in. A good real estate agent will let you know if your vision is realistic and what is available in the market. Discuss the timeframe for buying and what time works best for showings. The more your real estate agent knows exactly what you want and how you want it the easier it is for you to get the property you really want.
- Stay Firm With Your Offer. A rental property is an investment not only for the short term but for the long term as well. The price you pay for your property will impact your numbers for years to come. Every dollar that you increase your purchase price has an impact on your cash flow. At a certain point the property no longer makes sense. This is important to remember with every offer you make. You need to stay disciplined and not get caught up in a bidding war. The goal is not to take ownership but to buy a property that generates income. There are times when you need to walk away, as hard as it may be. By doing this you will lose out on some properties but the ones you obtain will be much stronger.
As you are making offers you can start to assemble your rental property team. If you are using a property manager now is the time to reach out to them and discuss exactly what they offer. You will also need a good handyman and possibly electrician, carpenter, painter and more. Rental property ownership is available to all investors. Don’t be intimidated by the process.