While investing in real estate is very lucrative, any novice investor is destined to face some pitfalls along the way. Rental properties can provide investors with the constant cash flow that they need to succeed as a distinguished investor. However, without the proper guidance and know-how, aspiring investors can make several mistakes that may cause some serious headaches.
You might be experienced in purchasing homes but becoming an investor in rental property involves different nuances compared to becoming an experienced home buyer. When starting out as a novice property investor, any advice can help you make a well-informed decision for all future investments. Here are 5 tips to consider when finding your first rental property to invest in:
- Don’t start as a house flipper
- Prepare for the unexpected
- Understand the down payment
- Know your tenants
- Choose the right property
Don’t start as a house flipper
The idea of purchasing a cheap property and flipping it to make a profit can be tempting, even to the most experienced investor. However, if you’re starting out, you shouldn’t flip a house as your first investment property.
Fixer-uppers require a high level of attention. They’re costly in more ways than one. They’re a commitment that needs a lot of time to generate a profit, but they also generally require a large amount of money.
If you start out with a fixer-upper, you might underestimate the costs associated with turning a profit. All the maintenance and repair costs, coupled with the time commitment, might prove less fruitful than you might have imagined. Only invest in a fixer-upper as your first rental property if you have the means to minimize the time commitment and the repair expenses.
Throughout your investment career, you might meet the right contacts to provide the services you need to keep those costs down. Investors experienced in house flipping typically have a range of contacts or know contractors that can provide renovation and repair services at a cheaper price, giving them a larger return on investment.
Prepare for the unexpected
Managing your money is crucial to being a successful investor. As aspiring investors begin to look for rental properties to purchase, they might not have enough money to purchase and maintain the property. Hiccups are bound to happen and emergency expenses can put quite the drain on your funds.
If any aspiring investor is looking to purchase their first rental property, it’s important to save as much as they can to maintain their cash flow. Paying enough debt off can be helpful since it can allow more money to be saved in the future. Thus, minimizing debt and saving enough money will allow investors to have a higher reserve of emergency funds that can be used to pay for any unexpected expenses—be it emergency or otherwise.
Understand the down payment
As you continue looking for a rental property to invest in, you might come across properties that require a down payment of at least 20%, which is probably significantly higher than the down payment you might have put on your own home.
Investment properties typically require a higher down payment from buyers. However, down payments can be reduced if you decide to live in the rental property. In doing so, the rental property will be considered as owner-occupied which will significantly reduce the down payment to 5%, depending on the number of units of the building.
Thus, the price of putting a down payment on a rental property is dictated by your decision to reside in the property, as well as the number of units the building has.
Know your tenants
Finding the right tenants for your building might be a little difficult. If you choose the right ones, then you shouldn’t worry about rent payments. If you choose the wrong ones, you run the risk of waiting on payments when you need it the most. And if you don’t find any, then your rental property will become quite the money pit and will not be producing any sort of profit.
The best option for finding the right tenants is to do a screening. Screening any prospective tenants allows you to make the right choice as it provides any information regarding past evictions, previous addresses and criminal backgrounds.
Choose the right property
Arguably the most important thing to consider when investing in a rental property is the actual property itself. All investors strive to achieve the best ROI possible from their investments, so it’s undeniable that all the intricacies in choosing the right property is vital to their success.
When looking for rental properties, consider both the area and price. As your first rental property, you should always start low with properties priced at around $150,000. Consider the various amenities that a property offers, and look at the surrounding area for malls, stores, doctor’s offices, and other locations that are important to your tenants. If you’re looking to rent your property out to students, make sure that there are places nearby that can offer student employment. By knowing the area you’re planning on investing in, you’ll have a sense of what tenants you’ll be attracting to your rental property.
While investments may be risky, you can always make calculated decisions with the right understanding. From choosing the right tenants and property to saving your money and managing it, you can be well on your way to purchasing your first investment property and making a successful investment out of it.