Getting started with your first rental property investment

Individuals who have decided that this is the year to finally take the plunge into property investment may want some guidance. There are a number of important considerations that investors can use to navigate the process of identifying and purchasing an initial rental property. With the new tax regulations, now may be the right time to get into owning and managing an investment property to create an additional income stream. What should potential first-time property investors interested in single-family or multi-family residences know?

1. Determining a budget

Property owners and landlords need to understand how much it may cost to buy a property AND to maintain it. Keep in mind, an investor will be assuming monthly mortgage payments, property tax payments, and fees associated with maintenance and repairs. Other costs may include HOA fees, landscaping, and pest control when applicable.  

An important aspect that may significantly increase or decrease potential profits is whether or not a property owner can handle routine maintenance tasks and repairs themselves, will hire a licensed contractor, or prefers to have an outside individual, such as a handyman, property manager, or property management software, deal with the care of the property and client communications on their behalf. The rent charged to tenants should still leave room for profit, after all outgoing costs are subtracted. Operating expenses should fall between 35 and 80 percent of the owner’s gross operating income.  

2. What to look for in a house

Begin by determining which areas may offer suitable investment properties. Compare rental properties, their neighborhood, and property sizes. A first-time property investor wants to know about what they may realistically charge tenants in a selected area for a property of a certain size and condition. Some suggest that first-time investment owners get a low-cost home to reduce ongoing expenses and others recommend avoiding properties that are fixer-uppers as an initial investment property.

Get ready to find the right property.

A real estate agent who is experienced and knowledgeable about the state of the local market can help a first-time investor identify properties with good investment potential, provide information about changing trends and insight on neighborhoods which may soon be hot areas. It is worthwhile to speak with other local property investors and find an agent that is easy to communicate with and clearly understands personal objectives. 

The agent should have extensive experience assisting buy-and-hold property investors. Such an individual will be able to assist a first-time investor when it comes to expectation around making an offer and which negotiating tactics may work with certain sticking points.

Understand the needs of the ideal tenant.

What do targeted tenants want and expect from a rental property in the area? Decide whether to target mid-range buyers, high-end buyers, single professionals or families. Will work commutes, proximity to a lively downtown area or to well-rated schools be some of the points that will be considered by prospective tenants? Focusing on an ideal tenant will help in determining which properties will be worth looking at and how much money to potentially invest in a property prior to renting it out.

What type of work is required prior to listing the property?

Some first-time property investors are handy and knowledgeable about many DIY tasks and can reduce their costs with their own sweat equity. Those who do not care to perform such tasks may want to look for homes that require few if any repairs or upgrades. Hiring a contractor may end up eating away at any initial profit from renting out a property. Be aware that some repairs and updates should be done by licensed professionals, such as electrical work or plumbing upgrades.

3. What finances to prepare

In order to qualify for good terms on a conventional loan, first-time investors want to get their credit score as high as possible. Lenders are willing to offer better terms for those with a credit score of 720 or above. Anyone considering applying for a mortgage loan should periodically review their credit score, address any inaccuracies and see how paying down debt and reducing their debt-to-income ratio may serve to increase their credit score.

Conventional mortgage loan options offered are fixed-rate and variable rate. Those who are looking for predictable payments may find a fixed-rate mortgage loan the better option. In addition, the down payment required for an investment property is generally larger than for a mortgage loan for an owner-occupied property. First-time investors will need to be able to put down a minimum of 20 percent to be eligible for a mortgage loan offering decent terms.

Get Clear on Personal Goals

What type of return can be expected from the property and how much money and energy will an owner be willing to invest in owning and managing a property? Potential investors need to account for many factors as owning an investment property may also be like taking on a part-time job. However, for many, investing in rental properties offers a return that is higher than other types of investment options and may serve as a nice complement to an individual’s portfolio.

Originally published on Groundwork