If you want to get into real estate investing, you have a lot to consider – more so than goes into purchasing an owner-occupied residence. Because a rental property is supposed to make you money, you have to look at all aspects of the financial components of buying the property.
We discuss the most important areas below.
The Home’s Condition
First, you must look at the home’s condition. What repairs are necessary? First, consider the repairs that will make the home livable. Without these issues fixed, your likelihood of renting the property out is slim to none.
Once you know the necessary repairs, next consider the repairs that you would want to do to make the home more attractive. Renters can be choosy as there are many options out there today. You want to make the home as ‘homey’ as possible with as many amenities that you can include.
Do your homework to see what renters in the area want. What types of homes do they rent? Which ones have the most attention? This is your main competition. If you cannot provide something similar or above what is already available on the market, renting the home out will be difficult.
Once you know the repairs you must do and those you want to do, it’s time to figure out if you can afford them.
- How much will the repairs cost? Will you do them yourself or will you have to hire someone?
- Do you have a contingency fund to cover any emergencies that arise while making the repairs?
- Do you know the value of the repairs/modifications? In other words, how will they affect the home’s value moving forward?
You can use these numbers to compare to your budget to see if the home is even feasible. Is it within your budget or should you look elsewhere? Even if you have the best ideas in mind for the home, if you can’t afford to make that a reality, your chances of making money on the home disappear quickly.
Knowing the home’s condition is the most important thing to do first. Once you are sure of its condition and your ability to make it perfect, next is the home’s location.
The Home’s Location
Buying a rental property out in the middle of nowhere probably won’t get you the income you had hoped. Instead, you want to buy one that is in an area where the renters are. You can do a little research online to find the most popular places to rent homes and start your search in that area.
Focus your research on busy areas, such as those with shopping centers, community centers, and schools. These are the areas people flock to the most. Next, research the neighborhoods in the area. Do they have a good reputation? What are the school districts like? These are things renters are going to look at when deciding to rent your property.
Finally, consider the type of clientele that will likely rent the property. Look at the population of the area. Are they people that you think will take care of your rental property or trash it? Remember, you are in charge of maintenance and repairs. You want tenants that will care for your property as if it were their own.
The Home’s Value
Securing a loan for an investment property is harder than it is for an owner-occupied property. You will likely need to put more money down on the home and have a lower debt ratio. Lenders take a bigger risk when lending you money for a home you won’t live in. If you run into financial trouble, chances are you will stop paying the mortgage on the home you don’t live in rather than your owner-occupied residence.
Knowing the home’s value will help you decide if it will work. You can compare the value to the money you have to put down. Will you put a large amount of your own money into it? Will you receive decent rent for the area? Ask a professional realtor for the average cost of rent in the area so you can compare it to what you expected to receive. How does this amount compare to the mortgage payment? Do you come out ahead or would you still be behind?
Your Ability to Manage a Rental Property
Finally, you need to consider your ability to manage the rental property. Where is it located compared to where you live? Is it convenient to get over there to make repairs and/or check on your tenants? Do you have the money available should something go wrong with the home? What about if the tenant stops making the rent payments? Can you afford the mortgage payment on your own?
Lastly, you should consider your ability to handle the maintenance and repairs. If you have to hire someone, do you have someone handy that can get over their quickly? Do you have the funds to be able to pay this person?
Buying a rental property can be exciting and nerve wracking all at the same time. Doing your research and making sure you truly understand the process is important. Finding the property that is likely to be rented and stay rented is important too. Enlisting the help of a licensed real estate professional in the area can help you make the decisions that work best for you.Click to See the Latest Mortgage Rates»