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Tips for Buying Rental Investment Properties
July 6, 2022 | Posted by: Ralph Covello
Most people float the idea of investment property around at some point in their life, and the growing popularity of real estate buy-and-flip shows only makes the prospect more enticing. However, before taking out multiple mortgages or meeting with private lenders, it's imperative to understand more about real estate investment.
Now is a great time to invest in real estate property. Most millennials choose to rent versus buy, and interest rates are reaching historic lows, but some responsibilities and headaches come with investing in real estate. Rental properties do not immediately equate to passive income, as rental owners have to maintain properties, find and retain tenants, and constantly update their properties to protect their investment.
However, the trade-off for that extra headache is a monthly stream of revenue and the potential to sell a property eventually for profit. Real estate investment is considered one of the safest forms of investment since tangible property generally holds its value if you work with knowledgeable mortgage brokers and choose the right areas to invest in.
What that in mind, if you are ready to invest in real estate rentals, here are a few things you should know. The following tips for buying rentals aim to ensure your investment is sound and will continue to add value to your investment portfolio over the next few years.
Choose the Right Location
Property ownership as a landlord is an exciting animal, as it doesn't always follow the same rules as traditional property ownership as a homeowner. Areas with high appreciation often result in low cash flow for rentals because you usually can't have it both ways. Investors who anticipate a high appreciation value are willing to give up some cash flow by securing a higher mortgage. At the same time, the best deals on rental properties lay in areas with low appreciation rates, which means there is a higher potential for monthly cash flow. Therefore, you have to determine your investment strategy upfront and get comfortable with one or the other.
Choose the Right Buying Option (Buy or Finance?)
Of course, before you start looking at a location, you need to decide if you will purchase your rentals or finance your purchase. Contemporary wisdom suggests that buying a house is the smarter decision because then the cash flow is entirely yours; however, when you break down the cash return on owning a home versus investment, sometimes leveraging a property by financing results in a higher cash return. Therefore, it is best to talk to a trained mortgage broker about your options and do the math before making a final decision. How comfortable you are with debt will also heavily influence your ultimate decision.
Get Comfortable with Long-Term Investment
Most people obtain a mortgage when they first become a landlord, and you won't see positive cash flow during the first few years of real estate investment because of the high costs of upkeep and mortgage interest. The longer you own a property, the higher your appreciation rate and cash flow. Therefore, you have to be comfortable with long-term investment. If you aren't, property investment might not be the right investment tool.
Determine How Landlord-Ready You Are
Speaking of which, you also need to evaluate if you are ready to be a landlord. Landlords must be available 24/7 since emergencies can happen at any time, screen tenants, schedule repairs, and handle disputes among tenants. Not everyone is comfortable with that level of interaction or responsibility. Alternatively, you can hire a management service to take care of these tasks, but they will take 6-10% of your rental income.
Create an Emergency Budget
While rental income can be intoxicating, it is essential to keep 20-30% of your rental income aside for emergencies and maintenance. As a landlord, you can't wait to make repairs, and you are legally compelled to care for your properties, so you need to be prepared for all scenarios.