Answering the thought of how to buy your first rental property can be a daunting task. Investing in a rental property is not a minor life decision. It’s something that requires careful thought and consideration, as well as a great deal of work. It’s not an easy job to have, and it’s more like its own kind of job. You have to pay for the home, maintain the home, get someone to rent the home; you have to manage the home and your tenants and you have to be present. It’s not passive at all, even though so many people believe this to be a great form of passive income (it certainly will not seem passive when your tenant calls you at 2 am because the toilet backed up).
Investing in a rental property is huge. My husband and I have a rental home, but we kind of fell into it. We built our first house over a decade ago when all homes and lots were beyond expensive in the housing boom. When we realized that we were having twins and that would make us a family of six, the house we built when we were first married and without children was suddenly not even remotely large enough. We had to buy a new home, but the market had yet to turn around. We couldn’t sell it for anything close to what we wanted to sell it for and our dream house sort of fell into our laps as a foreclosure for sale for less than half of what it was worth. What were we to do?
We have been landlords now for 11 months. So far, it’s been pretty good since our tenant is my mother-in-law, who had a burning desire to be closer to her grandbabies, and it works well for us all the way around. However, not everyone gets a dream tenant and has nothing to worry about. That’s why you have to understand how to invest in your first rental property, what to do and what to consider. Here goes nothing.
Understand what you can afford
It goes without saying that you need to be able to afford the rental home you want to purchase, but you’d be surprised how many people forget this. Do not purchase something that you cannot actually afford to keep up with if you have no tenants. Sure, you might have the income to spare according to the bank that approves your loan, but you don’t have it if you have other expenses such as gas and groceries and childcare and others. Do the math, and do it again. Be completely sure. There are so many factors that go into buying any home, and it’s imperative that you do not fail to consider each and every one of them before you sign on the dotted line.
Remember the extras
Most people tend to forget that there is more to a rental property than just a mortgage – which is why I believe that rental properties should be purchased in cash. However, many people have to start the business paying with a mortgage. Do not forget, though, that you have other things to pay for. You have to pay for property taxes, insurance, utilities and so much more – even when you do not have a tenant. Sure, the tenant will take over the utilities and you can add insurance and taxes into the rental agreement, but there is no guarantee that you will always have a renter, and you have to be safe. You may also need association management and rental property management services so be sure to include the fees to your budget.
Furthermore, you become responsible for fixing any damage or issues that arise with the house, so you must have the savings set aside to do that at any time. You never know when someone will call in the middle of the night mad that the air conditioner isn’t working.
Find a mortgage
Here’s where things get a little tricky. You cannot use the same kind of traditional mortgage to purchase a rental home that you would your primary residence. What this means is that you have to look for a buy to let mortgage. When doing your math and figuring out what you need, add this little bit of information to the process to get the correct numbers and to make sure you are filling out the correct applications at the bank.
If you find this concept confusing – and many people do – talk to a loan officer. Go to your bank and sit down and talk it out. It’s what loan officers do. They can help you understand what the difference is between mortgages and loans, what it means to apply for a rental home mortgage and they can answer your unanswered questions. And while we are talking about it, it doesn’t hurt to speak to an investor that knows the area before you begin your search for the perfect rental property. He or she might be able to provide you with a little insight and a little bit of know-how so that you can get a leg up on the game.
Is the investment worth it?
Now that you’ve done the math, ask yourself whether or not you can afford to do this. Is the return worth it? Is your area big on renters? Are there people where you are looking to pay what you are asking? Can you legitimately ask what you want for a home and have any prayer of getting that much in rent every month? It all depends on where you live. There might be a need for many rentals in one another and none in another. Additionally, you can’t just invest in anything.
For example, a home that has two bedrooms and one bath and less than 1000-square feet might seem like a really good deal if you can pick it up at the right price, but if that house is in the middle of a suburban community where most homes are three times as large and have three times as many bedrooms and bathrooms, and most people in the area happen to be families of four or more, you’re really not going the right direction.
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