In the US, real estate is a favored investment choice for many people. The objective is to buy a property to rent and then use that income to satisfy the mortgage payments. After the mortgage balance is reduced, the owner will sell the property to garner a profit. As an investor, you must have a tolerance for the risk involved, not to mention the work a property owner and landlord must undertake. It’s an ideal way to earn income and among the best choices for getting returns, but it’s challenging.
Whether residential or commercial, the landlord must maintain the rental and interact with the tenants to make sure they retain good people and that the rents are paid consistently and on time.
Some property owners choose to outsource the management to a third-party company to make the investment more of a passive income. Regardless, the demand for real estate is high and continues to increase for seasoned investors or individuals who only want to dabble in the market.
How Do You Invest in a First Rental Property
Buying real estate to rent and then selling for a profit is common for investors who want to build a wealthy portfolio, whether only a couple of properties or many.
The option is available to either stick with residential rentals or move into commercial real estate. Visit https://moneytips.com/homes/investment-properties-second-homes/rental-properties/how-to-buy-rental-property/ for guidance on what to expect when becoming a rental property owner.
Residential can include single family houses or apartments and condos. Commercial investments could involve office complexes, retail space, or any structure used for business.
As the owner, you must maintain the properties and keep them rented with responsible tenants who pay on time consistently until you’re ready to sell. You can also hire a management company to handle the responsibilities on your behalf. Here are the steps to real estate investing and getting started with your first house or building.
The budget
The rent should cover the costs of the mortgage payments and other expenses. If you intend to buy again, the concern will be whether you have the funds to do it. A financial counselor can be beneficial in helping to set up a well-thought-out budget.
Any upfront costs associated with buying property and recurring expenses must be factored into the plan.
Recurring expenses: These include
- HOA fees
- Property tax
- Vacant spaces
- Landlord insurance
- (Optional) Management company
- Repairs/maintenance
Upfront expenses: These include
- Cash reserves – recommended roughly six months in reserve
- Down payment
- Closing costs
The preapproval
Preapproval for a mortgage will allow you to calculate the approximate borrowing amount when buying houses or buildings. Lenders base preapprovals and the eventual loan on creditworthiness, financial standing, and debt ratio.
Either an FHA or conventional loan is standard when purchasing a house, each with varied criteria, as is true typically when applying for a primary residence loan.
FHA
This loan type allows borrowers to purchase a dwelling or complex with as many as four residences or offices, but one of the spaces needs to be owner-occupied. Credit scores must fall above “580 with roughly 3.5 percent as a downpayment, but if you put down 10% or more, the credit score can be 500 and above.”
Conventional
This loan type requires a good to excellent credit score between “640 and 700 based on your debt status, down payment, and the number of residences in the property you’re purchasing.”
The management company
Those who want more of a passive income can hire a management company to handle most of the work that comes with a rental. This can include hiring someone for repairs/maintenance, collecting rents, and communicating with the tenants.
Some people buy properties a distance from their location and use this option for handling the rental. Costs are a consideration when developing a budget for recurrent expenses. The expense can vary up to as much as “10 percent of the property value, not including additional expenses incurred.”
The properties
For a first-time rental property owner, the recommendation is to purchase in a relatively popular area, a new community, to improve the chances of finding good tenants and to relieve the repair/maintenance costs.
Area/location
Where you decide to purchase will determine the renters drawn to the location and the potential for vacancies. If the house is in a trendy part of a city in the hub, professionals working in the city would be attracted to the location.
On the other hand, students would be less reliable, particularly during the summer months. Find guidance on choosing rental property at https://www.bobvila.com/articles/choose-rental-property.
Condition
Upfront expenses will be greater for a “fixer-upper” and likely involve more repairs/maintenance. Those with maintenance skills and who are within close vicinity could help reduce the costs.
Others would be wise to search for something more up to date. The price point might be higher, but at the end of the day, long-term costs would be less.
The taxes
Finding a property in a lower tax range could help you avoid hundreds of dollars tacked onto the monthly mortgage payment.
The rent
Find out where rent costs fall in the area you’re looking in to see if these will be sufficient to cover your expenses.
The landlord’s insurance
As a landlord, you must have a special homeowner’s insurance plan when renting to tenants for longer than roughly “six months.” Landlord insurance is meant to recover costs for any property damage and covers liability.
The premiums for this coverage run approximately “25 percent more” than a typical homeowner’s plan. Many landlord plans will also allow for vacancies offering coverage for rental income losses if the spaces are undergoing maintenance/ repairs due to damages from a loss that the carrier covered.
Final Thought
Becoming the landlord for residential or commercial properties isn’t suited for everyone. Real estate investment can be a risky and challenging undertaking, even when hiring a management company. It’s important to weigh the pros and cons to help with the decision-making process.
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