Thinking About Buying Your First Rental Property? Consider These 5 Things First.
The ownership of real estate has resulted in some of the world's wealthiest people, so there are many reasons to consider it as a sound investment. In order to make the best of your investment, there are few key things to keep in mind when you are considering the purchase of your first rental property.
If you are financing the purchase of your rental property, in most cases, the down payment requirement for properties used for investment purposes is more than for primary residences (owner-occupied properties). This is because banks typically consider investment loans to be higher risk than loans on primary residences (think about it: if you were to run into financial trouble, which mortgage would you pay first? The mortgage on an investment property or the mortgage on the home you live in?).
Because of this, the down payment required is typically around 15%-20% of the purchase price of the home, whereas owner-occupied properties can be purchased for 0%-10% down, depending on the loan program you choose.
It is important to understand the rents in the area you are considering a rental property purchase. Things like the location, a property’s size, availability of rental properties, property features and area community or neighborhood amenities all play a role in the amount a property may potentially rent for. And understanding how much income a property can generate from rents is very important, as this income is what is used to cover the property expenses.
Consider vacancies, maintenance, repairs
It’s nice to think that your property will remain fully occupied year-round, and the property will forever remain in great shape. The truth is: vacancies happen and repairs are sometimes needed.
Much like researching rental rates, you can research vacancy rates for certain properties as well. These vacancy expenses should be included as part of your analysis.
When it comes to maintenance and repairs, your property should be regularly maintained (otherwise, small problems can eventually turn into big ones!). Small repairs may need to be completed while a property is being rented or in between tenants.
Understanding other property expenses
In addition to the expenses previously mentioned, it’s important to have a good understanding of all of the property’s expenses, such as HOA fees, taxes, insurance, trash collection, utilities, and management fees if you decide to have a property manager.
Some expenses may be able to be passed on to your tenant, but this should be clearly defined in your lease agreement.
Have cash reserves
“Reserves” simply refers to any liquid assets you have leftover. A property “savings account,” if you will.
Setting aside a percentage of your rental income each month helps absorb any unexpected expenses and major capital repairs (for example, new HVAC units or water heaters) that may eventually happen. Having funds set aside helps ensure that you’ll be able to maintain the property for the long term.
As with any investment, purchasing a rental property may not produce a large monthly paycheck right away. But being diligent in your selection and management of your property could lead to big rewards in the future. If you’re looking to purchase a rental property in North Carolina or South Carolina, we'd love to schedule a call with you to discuss your options.