Investing in Real Estate is a surefire way to make your money work for you rather than money only coming your way when you’re laboring at your J.O.B. Rental properties, and especially those houses that you buy for the price of a car, MySmartCousin-style, are particularly well-suited for creating a money flywheel that generates cashflow even as you sleep. As with most new things, however, the hardest part is knowing what to do and how to get started.
As a Real Estate Investment coach, we at MY SMART COUSIN focus on new investors, and especially Black and Brown folks and women, in helping them to master the fundamentals of finding, analyzing, financing, and closing on a single-family or multifamily rental property that can be bought for the price of a car, and leveraging it to build generational wealth and influence.
Are you considering buying your first rental property? If so, you’re in good company. Many people are finding great success with rental properties, as there’s still a lot of potentials to make money, even with today’s red-hot housing market. However, it’s important to remember that there’s more to buying a rental property than just signing on the dotted line. Here are 10 tips for helping to ensure that your first rental purchase goes as smoothly as possible while delivering a great return on investment.
1. DECIDE WHAT YOU ARE LOOKING FOR IN A RENTAL PROPERTY
When buying a rental property, it’s important to have every detail planned out ahead of time. Before making any investments in this asset class, several factors should be considered and defined beforehand— from property location to acquisition and renovation budget to short-term versus long-term rental clients— so that you choose a house that aligns with your strategy. Another often overlooked factor to consider is your exit strategy. Even if you have no immediate plans to flip the property and intend to be a long-term owner, you should define what your best case and worst criteria are for selling the property. Being able to define a response to the two ends of the spectrum in a calm and studied manner always wins over doing so under the pressures of either a fire sale or a too-good-to-be-true offer. Once you have defined your purchase strategy, you can begin seeking properties that match this.
2. EDUCATE YOURSELF ON THE MARKET
Education and mentorship regarding the real estate market are crucial for aspiring investors. Once you decide to invest in rental properties, it’s important to gain as much education as you can before becoming an owner, rather than effectively paying your tuition through an overpriced purchase or frequent and costly repairs. One way to do this is to spend some time calling landlords who are renting properties in your target locations to tour their homes and ask questions about the neighborhood. Doing so through the lens of ‘potential tenant’ allows you to see firsthand what renovation styles and amenities are standard, and how widely or narrowly rents range.
3. DECIDE IF YOU WILL BE A HANDS-ON LANDLORD OR HIRE A PROPERTY MANAGER
Almost as important as determining how much investment property you can afford, or want to afford, is determining whether you want to be a hands-on landlord, or instead pay someone else to stand in your shoes when qualifying tenants and responding to maintenance issues. Both approaches have their pros and cons, and the right strategy ultimately comes down to your temperament and time. Temperament gets to whether you will be unphased or will blow your top each time a tenant reaches out to you with an issue or request. And Murphy’s law being what it is, of course, the tenant will always reach out to you with a maintenance issue at the most inconvenient time possible! Time gets to whether your schedule can accommodate responding to tenants in a timely manner. Even if you’re not actually going to the house to repair the toilet, for instance, you must have the flexibility during the workday and evening and weekends to answer your phone, listen with concern, ask questions so that you understand the issue, and then call one or more handymen to take care of the issue. If the answer to the temperament or time question is no, then you are better off paying the monthly fee to an experienced property manager.
4. DETERMINE YOUR PREFERRED LOCATIONS FOR A PROPERTY
Spending time finding the right locations for your first rental property investment is crucial. Your goal is to obtain a property that generates a sustainable, high, net operating income. A sustainable income means that all things being equal, a tenant who pays their rent, like clockwork, year after year, is more valuable than bringing in a new tenant every 12 months. A high net operating income means that your focus should be not just the amount of rent that you are bringing in, but also the money that you are spending to obtain this rent— for instance, maintenance repairs and property management fees. Or said another way, it’s not about the money you make, it’s about the money you keep. Generally speaking, neighborhoods that are in a sought-after school district, for instance, have a higher likelihood of stable rentals than neighborhoods with lots of warts and flaws.
5. FIND AN EXPERIENCED REAL ESTATE AGENT WHO CAN HELP YOU THROUGH THE PROCESS
With a little patience and help from an experienced real estate agent, you can find your dream rental property.
Many people are initially nervous at the prospect of trusting their investment to the care of strangers, but with some guidance on how best to handle the process of finding tenants or marketing properties, there’s no reason why anyone should feel stuck. Seeking a real estate agent who themselves is an investor, or who works with investors, is one good place to start.
6. SET REALISTIC EXPECTATIONS AND SPEND TIME PLANNING FOR THE DOWNSIDE
When you are peering over the fence as a would-be real estate investor and imagining how your life will change as a landlord, one of the first things that come to mind is how much money you will make. And yes, there is money to be made as a rental investor, both in terms of monthly cash flow and long-term appreciation. However, before investing some portion of your hard-earned savings on a property, it pays to spend some time thinking about the various risks of the property and the ways in which the investment could go wrong. Your goal in doing this is not to scare yourself to a point of inaction, but rather, just the opposite, to take action by mapping out the risks before they strike and a plan for managing them. As an example, one risk is that in the first month or so of owning the property, a major expense crops up— let’s say that the roof or furnace has to be replaced. One way to manage this risk is to spend a few hundred dollars having a roofer and furnace tech perform an inspection before you buy the property, so you know if you’re buying a property that essentially requires you to build in another $10,000, for an immediate roof or furnace issue (hopefully only one of these will go wrong in the first month and not both!).
7. GET PRE-APPROVED FOR YOUR MORTGAGE SO YOU KNOW HOW MUCH HOUSE YOU CAN AFFORD
Make sure you are pre-approved for your mortgage, be it from a hard money lender or a traditional FHA-type lender, so that you look at properties that cost no more than the upper limit of your financing, and ideally, much, much less. Being prequalified for financing before looking for properties also helps ensure that when you make your offer on a property, that the offer is deemed as serious by the seller rather than one that may or may not close. Additionally, consider what kind of financing you’re comfortable with. For instance, if you prefer lower monthly payments, then a balloon mortgage may make sense. On the other hand, if you can’t stand the thought of uncertainty, then a fixed interest rate might make more sense than a variable rate mortgage.
8. GET A HOME INSPECTION TO IDENTIFY ANY POTENTIAL PROBLEMS WITH THE PROPERTY
When you invest in real estate, it’s important to do so with your eyes wide open. Bringing along a friend who is an experienced investor is a good place to start, but especially for first-time investors, that should only be step one. Step two is hiring a professional home inspector and having the inspector explain the results of his inspection report to you. A good home inspector will identify what needs fixing now and what you can live with for a while.
9. NEGOTIATE REPAIRS WITH THE SELLER BEFORE CLOSING THE DEAL
The buyer should always negotiate repair work with the seller before finalizing their purchase. While investment property sellers tend to sell homes in as-is condition, it never hurts to probe this expectation as doing so allows you to potentially cut down on costs. If the seller is firm on as-is, you might ask them to share what repairs they’ve made over the last year or two on the house so you know where the potential trouble spots may be.
10. GET COMFORTABLE LEARNING THE RENTAL LAWS
There are numerous laws and regulations that govern tenant and landlord rights and requirements. For example, in many municipalities, landlords are legally required to provide disclaimers on their properties, alerting tenants of any known defects or issues before they move in. Even if you intend to hire a property manager who will ensure that all appropriate representations are made in your lease, or who will represent you at an eviction hearing, it pays to familiarize yourself with the regulations, as a part of understanding your new business.
SUMMARY
Congratulations on your decision to invest in a rental property! Owning a rental is a great way to diversify your investment portfolio beyond stocks and bonds, build equity and create passive income. It’s important to remember that there are some unique considerations when making your first purchase. We hope our tips have helped you get started on the right foot. Thanks for reading. Let us know about your house hunting journey!
RECOMMENDED READ: How to Invest in Real Estate While Working Full Time
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