Some of the most successful people in the world started out by investing in real estate. Real estate is one of the few assets you can purchase that is likely to increase in value over time. Furthermore, if you invest in a rental property, you can immediately begin recouping your costs.
However, if you’ve never invested in commercial real estate before, you might feel a bit of trepidation, and that’s okay. It’s better to take your time and make an informed decision, rather than jumping in headfirst.
We want to help you make the right choice. Keep reading for a quick guide on buying your first rental property.
1. Define Your Business Goals
First, you need to identify your goals. What are you looking to get out of your real estate investment? What are you willing to put in?
Some people invest in real estate to fix-it and flip-it and make a one-off return on their investment. However, if you want to buy a rental property, that means committing to a long-term investment. You’ll be responsible for that property as long as it’s in your name.
Therefore, we recommend starting small to assess your skills (and patience) as a landlord. If you find that being a landlord is worth the return, you can start investing in other properties.
2. Determine Your Budget
Next, you need to figure out how much you can afford to spend on your investment property. If you’re getting a loan, determine your monthly budget. How much can you comfortably afford to spend each month?
Remember, however, that this figure includes more than just your loan payment. Depending on the property, this might also include utilities, property taxes, maintenance, repairs, renovations, and common area maintenance fees.
If you don’t get a renter for several months or lose renter months down the road, will you be able to afford the costs on your own?
3. Identify Your Loan Eligibility
If you need a loan for your rental property, you also need to figure out how much money you can get approved for. Get pre-approved to better understand your available funds.
If you have a low credit score, the bank might not approve you for a big enough loan to buy the property you want. You may need to spend time improving your credit score before you’re ready.
Alternatively, consider using a private lender. They come with several benefits, including fewer requirements. Getting a loan through a private lender is often simpler and faster, as well.
4. Look Into Your Financing Options
There are several options for obtaining loans for rental properties.
As noted above, you can get a conventional loan. This requires a decent credit score, a low debt-to-income ratio, and a sizeable downpayment. The downpayment amount depends on the type of loan and the lender.
If you use a private lender to get a rental loan, it’s typically more flexible than a conventional loan. These lenders focus on the property itself, rather than just the borrower. Private lenders take into account the property value and its potential cash flow.
Alternatively, you can look into other investors. These can be silent or active business partners who can bankroll you or co-sign on a loan to improve your eligibility. Private investors can be angel investors, investor groups, or friends and family members.
Finally, consider using a crowdfunding agency to raise the finances you need to buy your rental property. The donors are either paid pack with interest or are given a stake in the investment.
5. Choose the Right Location
The right location for your investment property depends on what type of property it is. For example, if you want to buy a single-family home to rent out, you need to find a house in an affordable, but safe neighborhood.
Make sure you do your research, however. If you buy the home for next to nothing but are charging inflated rent prices, you’re not going to attract many tenants.
Alternatively, if the rental property you buy is a commercial building, you need to make sure it’s in the best location for your ideal tenant. For instance, if you’re ideal tenant is a shop owner, you should find a commercial property in a part of town that has plenty of foot traffic and drive-by visibility.
6. Identify Your Landlord Duties, Rights, and Obligations
When you invest in real estate and become a landlord, there are certain laws governing the way you conduct business. These laws vary based on the type of rental property you own.
If you buy a residential property, you must provide your tenants with safe, comfortable living conditions. There are also rules about how you handle rent, evict tenants, and maintain your property.
As a commercial landlord, you need to make sure the business operating out of your building is adhering to the city coding laws. This includes building capacity, fire safety, number of bathrooms, and other safety issues.
7. Hire an Attorney to Help You Create a Contract for Tenants
As a new landlord, we highly recommend working with a real estate or business attorney to help you draft a contract for your future tenants. They will also help you understand the complex laws you must abide by as a landlord based on the type of rental property you own.
At the very least, an attorney will provide you with the necessary legal guidance to help you avoid future lawsuits and get the most out of your real estate investment.
8. Invest in Insurance
Finally, it’s in your best interest to protect your assets. As a landlord, this means covering your property with the appropriate types of insurance policies.
Obviously, you’ll want basic property insurance. This will cover your costs in the event of fires, severe weather, break-ins, vandalism, and so on. You might also want personal property coverage, for things like appliances and equipment.
Additionally, invest in liability insurance. Landlord liability coverage protects your personal assets and finances if someone is injured on your property and decides to sue you for damages, medical bills, etc.
Finally, consider getting rent loss insurance, which is a type of business interruption policy. If something (other than bad luck) prevents tenants from renting your unit, rent loss coverage will help you make your mortgage/loan payments.
Looking to Invest in Your First Rental Property?
As you can see, there’s a lot to think about before making a real estate investment. However, as we mentioned before, real estate investing can be incredibly lucrative. It’s a great way to start building your wealth.
If you’re ready to take the next steps toward purchasing your first rental property, we can help. Apply with us today to find out what you can get approved for and see your rate. We would love to work with you to help you achieve your goals.