Investing in a rental property can be an extremely lucrative way to build a passive income, increase your wealth, and diversify your assets. However, for a first-time investor, it can be hard to know where to start. Let’s discuss a few tips to help you on your way to finding the perfect rental property, and explore whether this is the right investment for you and your family.
Are My Finances In Order?
Before you consider purchasing an investment property, ask yourself: Do I have enough money for at least a 20% downpayment? Do I have enough extra cash in the bank to ensure I can pay the mortgage if I can’t immediately find a tenant, or if I experience a temporary vacancy?
Real estate experts recommend that first-time investors spend around $150,000 on their first rental property. If you’re doing the math at home, that’s approximately $30,000 needed for that initial downpayment, plus extra. If you want to invest and need additional cash flow, consider getting a loan for your investment property to get you started. Aligning your finances and having a realistic expectation of the cost is paramount when choosing if a rental property is right for you.
Do I Have Realistic Expectations?
Make sure your expectations are in alignment with the reality of investing in a rental property. While it may seem like a simple way to earn passive income, it can be a lot of hard work on the front end.
Are you cut out to manage a property? When you make the commitment to a rental property, you are agreeing to become somebody’s landlord. Be prepared to handle both the excitement of collecting rent each month as well as all the headaches of being a landlord such as dealing with complaints, managing repairs, and more.
Is The Timing Right?
Is this the right time for you not only financially, but personally? Now that you are secure in your finances, it’s time to consider whether the timing is right for you and your family. Are you in a secure place with your career trajectory, and with your family’s needs? Are you still in debt?
While it’s not bad to carry a little debt as an investment strategy, consider paying off any large family debt such as student loans or outstanding medical bills before making a property investment. Not all of your debt needs to be paid off to invest, especially if you are expecting to use your returns to pay for the debt in question, but it is worth taking into consideration when choosing a rental property.
Do I Have The Necessary Skill?
After the purchase of a rental property, many investors try their hand at property management and contracting as well. If you buy a fixer-upper and plan to renovate it yourself, do you have the time and skills to invest in a safe and modern remodel of your property?
Are you handy? Once you start renting the house, will you be able to answer a tenant’s call about a broken AC, leaky faucet, or clogged drain? Do you have the communication skills it takes to outsource if not? If you’re planning a more hands-off approach, it’s worth evaluating your communication skills, as you’ll be regularly contacting contractors, repairmen, and property managers. Many investors live thousands of miles away from their rental properties and make it work just fine, but it’s worth considering the time and money it will take to outsource these tasks. Make sure to use a reliable real estate accounting software to streamline the transactions related to the rental business.
Is This A Perfect Location?
It’s important to choose an up-and-coming location where your rental property can appreciate. Whether you choose to invest in town or buy on the opposite coast, not every area is created equal as far as property value is concerned. The most important factor is that your property is increasing in value and is located in a desirable area that will draw prospective tenants.
Choosing to invest in an area on the rise can only increase your returns. Low crime rates, a decent school district, and a thriving job market are all key factors that will entice potential renters.
