10 TIPS FOR BUYING YOUR FIRST RENTAL PROPERTY
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
REO Properties for First Time Real Estate Investors
What Are REO Properties? Real estate owned properties (REO) are properties that the bank or mortgage holder takes ownership of— often due to foreclosure or a reverse mortgage balance — underscoring why the moniker, ‘homeowner’, applied so jubilantly the moment closing happens and the bubbly is poured, is rarely ever so. Depending on when you pull the stats, 1 in 3,000 to 1 in 4,000 homes in the U.S. are in foreclosure at any given time. According to ATTOM Data, approximately 151,000 foreclosure filings were filed in 2021, down from 2.8 million peak during the Great Recession. Foreclosures processes differ across states, but generally the mortgage holder begins the process to foreclose on a home three to six months after the ‘homeowner’ (again, not actually) misses their mortgage payment. The Pluses and Minuses of Investing in Foreclosed Properties REO properties are often sold at a discount to a move-in ready home in the same neighborhood, largely because the home is sold both in as-is and unknown condition. A home being sold in as-is condition offers little to no room for negotiation since the discounted price reflects the disrepair. The unknown aspect of these properties means that what you get is not only what you see, but also what you don’t see. Has the basement recently flooded? Who knows— the seller, who is the lender, doesn’t know the home’s condition, and the homeowner is not required to disclose it. Additionally, the seller offers no warranties on the sale, meaning there is no recourse for undisclosed defects. Where to Find Foreclosed Properties The REO route to property investment has a sense of derring-do and inside scoop, what with its off-book listings and short sale structures. These properties, however, are often hidden in plain sight.Government agencies are a plentiful if overlooked market for REO finds. Agencies ranging from Fannie Mae and Freddie Mac to Veterans Affairs and the Department of Agriculture find themselves the unintended owner of foreclosed properties as a mortgage guarantor. Private sector entities such as auction companies and mortgage lenders are another channel for properties. Purchase Checklist: Before buying an REO property, ensure that you do a thorough inspection. Using a professional inspector is the gold standard but if you give the property the once-over yourself or with a contractor, pay particular attention to structural or foundation issues, the electrical wiring and panel box (copper is great, aluminum or knob and tube, not so much), the heating system age and type (a furnace that’s less than 10 years old and gas is great), the attic/roof condition, evidence of mold or water damage, and the plumbing. Appliances, drywall, flooring, cabinets and fixtures are cosmetic, easily fixed and much cheaper to remedy. See also: The Skinny on Fix & Flip Investments