So, you’re interested in investing in rental real estate.
What do you need to know to get started?
Rental real estate is a highly lucrative opportunity for rookie and experienced investors alike. However, you must do your research first to ensure your investment is sound.
This involves understanding property types, calculating your return on investment, and confirming that all the necessary legal components are in order.
The following checklist for buying rental property will help you identify what you should do before purchasing any rental property.
1. Choose a property type.
The first step to buying a property is choosing a property type. Which type of property is the best investment in your area, and which can you reasonably manage?
You may choose to purchase a single-family home (SFH), a popular choice for new investors. SFHs are rented to individual tenants or families and are generally easy to manage. Multi-family homes (MFH), such as duplexes or triplexes, contain multiple family units in a single dwelling unit.
Maybe you’d rather invest in a larger complex. Complexes are less common for first-time investors due to the additional management challenges, but they can be highly profitable.
2. Analyze the local market.
Next, you should analyze the rent rates and profit potential of your local market.
If you’ve decided to purchase property in a specific neighborhood, evaluate what local properties are selling for and what their landlords are charging for rent.
You shouldn’t expect to spend the same money on a property in every city. In fact, rates and prices vary considerably depending on geographic location, local demand, jobs, and other factors.
If you have several properties in mind, keep a spreadsheet to track their addresses, prices, nearby rates, and amenities or features. By weighing each factor in coordination with your data, you can evaluate which property is your best investment opportunity.
3. Calculate return on investment.
When determining what to know when buying rental property, return on investment is at the top of the list.
Return on investment (ROI) is the ratio of rental revenue you expect to earn, or annual income, to the initial purchase price. An ROI above 10% is generally considered a good investment. The higher your ROI, the more cash flow you have and the more profit you make.
You should not proceed with a purchase before considering ROI for rental property. There are many online calculators for ROI that can help you consider the complexities and details, including mortgages, interest rates, and inflation.
4. Confirm property title documents and tax receipts.
Once you’ve chosen a property, there are several legal boxes to check. First, you must confirm that the property title documents are in order. Hire an attorney to verify that the seller who listed the property is, indeed, its legal owner.
You’ll also need to confirm that the seller paid their property taxes. You can do this by asking for copies of their property tax receipts.
5. Perform an inspection.
Next, inspect the property you intend to buy thoroughly. You never know which damages, repairs, or issues you’ll discover during a physical inspection.
In fact, it’s a good idea to hire a licensed property inspector for this job. They will know the right places to look and what to look for during an inspection. Consider getting help from a professional heating and cooling company, an attic insulation company, or a sewer line cleaning company in Austin, Texas, Boston, or wherever you’re located.
6. Write a property purchase agreement.
You’re almost ready to purchase your property. Before then, you and your agent must write a property purchase agreement. This is essentially a contract that spells out the conditions of the sale—most importantly, the purchase price.
Your real estate agent will work with you and the seller to settle on a price and write up any conditions resulting from the inspection.
After signing this document, you’re done! You’ve successfully purchased your rental property and are ready to start preparing it for tenants.
Bonus Tip: Decide how you’ll manage your new property.
Have you thought about how you plan to manage your new property? If you haven’t, now is the time to start thinking about it.
Many landlords, especially those with large portfolios or additional responsibilities, hire a property management company or resident manager to manage their investments. As a first-time landlord, however, you’re often better off managing your properties yourself with property management software. It’s cheaper, simpler, and will assist you with learning the basic tasks of running a rental business, including collecting rent online and creating lease documents.
It’s easy to become overwhelmed at the number of steps required to purchase a rental property. You may be wondering, is buying rental property worth it? The answer is almost always “yes.” The cash flow potential, investing experience, and opportunity to start your investing portfolio are all well worth the initial effort.
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