How To Buy Rental Property: What You Need To Know Before Buying a House To Rent
The demand for affordable housing rentals is skyrocketing around the nation, especially as the prices for homes continue to rise nearly everywhere. Many younger generations either can’t afford buying a home or don’t want to, leaving the only viable option of renting a place.
So, if you’re wanting to get into the rental businesses, there’s a lot to understand before getting started. You need a place to rent out, to know how much to charge, what bills you need to cover, how to make repairs to the place, learn how to identify the right tenants and how to weed out the bad ones.
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Should I Buy a Rental Property?
Unless you inherited a home from a long lost uncle you never knew about, it’s likely you don’t have a place right now that you can transform into a rental. That means buying a place to either become a rental property, or buying a new home and transforming your current home into a rental.
For most people, especially if you are buying your first rental property, you’ll need to get a loan to buy a place. Since it’s an investment for future income, you’ll be getting an investment property loan, which can have high interest rates, at least a 20 percent down payment, and additional taxes to cover.
But buying a rental property is more than just about the money. By renting a place out, you become a landlord and have to handle all that entails. That means finding tenants, repairing and maintaining the place, collecting rent, paying extra bills, and more. There is also not a guaranteed ROI on renting out a place, especially if you can’t find tenants. If all of this sounds like too much of a hassle, buying a rental might not be for you.
Benefits of Buying a Home to Rent Out
Becoming a landlord and renting out a home is a wonderful way of bringing in extra income without a significant increase in extra work. If the home is well maintained and your tenants have a long term contract, you could earn thousands for doing practically nothing.
Another benefit to buying and owning a rental home is the real estate investment it provides for you and the eventual payout you’ll get when you sell it. You’ll grow the equity the property has, and if you stay up to date on maintenance and improvements, could sell it for a massive profit.
Risks of Investing in Rental Properties
Every investment comes with risk, and buying up rental properties is no different. There is no guarantee you’ll find tenants to rent it out, or that the tenants cause significant damage to the house. The entire investment rests on somebody renting out the place and keeping it in decent shape.
The housing market isn’t completely stable, and does go through high and low periods. There is always a risk that a home purchased during a peak in the market could become a bad investment if the market price drops like it did in 2008. That could mean being stuck with a too expensive home to rent out when competitors have lower rent costs.
Buying Your First Rental Property
Everybody has to start somewhere, and becoming a landlord is no different. It’s wise to begin with a single property, even if you have the means to buy multiple, to learn the ropes of the rental industry.
Instead of putting all of your eggs into the rental business basket, start small and make sure it’s a wise investment. Buy up a smaller rental property that is easy to manage, both physically and financially. Be sure to get a place where you can cover the mortgage with your current income and expenses just in case it doesn’t work out.
Depending on your area’s housing market, starting out small might mean buying a small single family home, or something like a duplex. Don’t buy out an entire apartment building or a large townhouse, keep your first purchase smaller.
Save Up and Shop Around
When you are purchasing a place for the purpose of renting it out and have to take out a loan to pay for it, you’ll be getting an investment property loan. Typically, these loans have higher interest rates and require at least a 20 percent down payment. It’s a massive purchase, so you might need to spend some time saving up for that down payment.
Don’t be afraid to shop around a lot, especially when it comes to picking out a place and getting a loan. Get multiple pre-approval estimates that include how large of a loan you can get and how much interest you’ll be charged. It’s a major investment, so make sure everything matches what you’re looking for before committing.
Then, get a real estate agent familiar with buying rentals in your chosen area and hunt for the right one for you. Using your pre-approval amount, the real estate agent can help locate ideal homes to transform into rentals.
Calculate Expenses and Set Up Prices
Once you’ve found a place you like and gotten approved for a loan, it’s time to calculate how much it’ll cost you and how much you’ll want to charge.
When calculating rent, you need to take the market value of your home and then charge around 1% of that value. So, if the home is worth $200,000, a landlord could charge about $2,000 per month. Depending on the local housing market and competitor pricing, you could fluctuate that price around .8% to 1.1% of the houses market value. If you charge too much money, you’ll have a hard time finding tenants, but charging too little means not making money off the investment.
Just be sure that whatever you end up charging, it’s enough to cover your rental’s mortgage payments, bills, HOA expenses, taxes, and general home upkeep.
Screen Your Tenants
A major part of being a successful landlord is properly screening your tenants. To start out, know how to do background and credit checks. This can help you make sure that you don’t have tenants with violent pasts and who are smart with their money. Commonly, landlords also ask for a recent pay stub to make sure potential tenants have the income to pay the rent.
Be sure to also meet the tenants so you can get to know them, and feel comfortable with them living in your rental. Many landlords don’t want smokers or pet owners in their rentals, and meeting them in person is a way to determine whether they’ll be a good fit for you and your property.
Know the Law
When it comes to renting, there are laws in place to protect the rights of both the landlord and the tenants. It is your job as the landlord to fully understand all of those laws and to know how to protect your property.
Contracts, rent controls, privacy, liability, and how to evict a tenant are all things you need to be familiar with before taking on your first renter. You need to ensure your home is safe to live in and that you maintain it as such. There are both federal and local laws you need to be understand before taking on a tenant. Then, make sure both you and your tenants follow the law exactly.
Get Professional Help
As you grow your business, or you find you can’t handle all of the responsibilities of being a landlord, don’t be afraid to get professional help. This could range from hiring a handyman to handle repairs and maintenance, to hiring a lawyer to help you understand and stay compliant with renter laws, or bringing in a rental or property management company. Just be sure you have the money available to pay for these services.
Joining the business of rental properties is a big investment, but can also have a lifetime of payout. Alongside month to month income, you’re also investing in real estate you can sell off later for a big payout. Just be sure you are prepared, can financially handle the extra burden, and that you’re willing to work hard at being a good landlord to help your investment pay off.
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Ben Allen is a freelance content creator and digital marketer who believes in helping small businesses succeed. He spends his free time bragging about his two daughters, eating stuffed crust pizza, and playing video games.
This post was updated February 28, 2019. It was originally published October 17, 2018.