5 Tips To Purchase Your First Rental Property

Share

Ready to buy an investment property? Done right, you can make a lot of money in real estate if you know what you’re doing. To have the best chance to succeed, check out our tips below. 

Figure Out If You Want To Be A Landlord

How much do you enjoy doing repairs on property? Can you handle fixing a toilet or doing roof repairs? Are you ready to screen your tenants and deal with people paying late? 

There is a lot to being a landlord, and not everyone is cut out for the job. If you still want to invest in real estate, though, you can hire a Houston property manager to handle your properties. They can take all the stress that comes with running a rental property, and you will just enjoy the profits. 

Pay Cash Or Finance? 

Some real estate investors say you shouldn’t buy an investment property unless you can pay for it in cash. But others argue that financing allows you to make more money over time. In addition, leverage will magnify your rate of return.

For instance, let’s say you buy a single-family rental in cash for $100,000. You get $12,000 of rent from the home and pay $1,000 in taxes on it. You’ll earn a cash return of close to 10% when you buy the home outright. 

But if you get an 80% mortgage at 4%, you can earn about $5500 per year after expenses. That’s a cash return of about 28%. 

Much of the decision to pay cash or finance comes down to your risk tolerance. If you feel more comfortable owning the property outright, that’s more important than anything else. 

Budget For Repairs

One of the biggest mistakes the new investor makes is not budgeting for repairs. You will not be able to make your total rent in profits every month; inevitably, the roof and AC need replacing or some other major repair. 

Landlords should reserve about 25% of their cash flow for each property for repairs and upkeep. That way, you have the cash you need when repairs crop up. If you don’t have the cash available to make a significant repair, you’re in trouble because your tenants will expect that repair to be done immediately. 

Buy Property For Cash Flow

The biggest reason to buy an investment property is passive cash flow. You can indeed purchase houses for tax reasons and appreciation, but the house should make you money every month. 

Many investors have a formula they follow when analyzing a deal; they only will buy if the property will generate a specific ROI. Others may establish a minimum in rental income for each unit after expenses. 

Figure out your criteria for cash flow according to your financial goals and how much risk you can handle. Then, look for investment properties that match your strategy. 

Look Closely At The Neighborhood

The neighborhood where your property is located dictates the tenants you can attract, how much you can charge them, and the vacancy rate. If you buy near a college, you’ll probably have younger tenants and run out of prospects on summer breaks. 

Many investors say you should buy in areas with low unemployment where the job base is expanding. That way, you know there will be plenty of potential tenants available for your units. 

Buying rental property is exciting, but you need to do your due diligence and set up systems and guidelines to ensure that your venture will be profitable. 

 

Comments

  1. Especially if you’re planning on renting property for your business, these are important tips to keep in mind. Budgeting is especially important, as you’ll never know what additional costs will crop up in the future.

Speak Your Mind