How To Buy Your First Rental Property – Real Estate Five tips for buying your first investment property Avoid the pitfalls to get that rental money to the bank!
If you’ve been reading, researching, and chatting about investing in rentals, here are some ideas to throw into the mix: ⠀
How To Buy Your First Rental Property
1. Make sure you’re okay with owning it. When things break, overflow, bleed or fall, you’re the one the tenants call. Will you be responsible for repairs and maintenance yourself? Or do you employ a recruiter? Be honest with yourself about what it takes to be an owner – and how much it costs
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2. Be aware of rental restrictions. Companies like Airbnb and VRBO are popular, so much so that many areas have passed restrictions on short-term rentals. You want to keep that in mind when you think about where to buy property.⠀
3. Confirm payment. To buy an investment property, you will need a large down payment. Since PMI is not available for rentals, you need at least 20% (most lenders require 25%, but a 15% down renovation loan is available for single-unit properties – ask for details !)
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4. Start with a single family home. Single family rentals require less maintenance than multi-family or commercial, and there is less wear and tear to deal with. ⠀
Tips For Buying Your First Rental Property
5. Buy a rental with an outdoor space, if possible. Renters like private outdoor spaces, especially pets. A fenced yard, spacious patio or screened porch will help set your property apart from the rest.⠀
I really enjoy working with first time investors; it is a very exciting journey. If you want to get into the rental property business, contact me. I would love to help. Many investors choose to buy real estate as a way to diversify their portfolios and generate passive income.
First, consider the property values of homes in different areas. For example, you will be looking at a much more expensive home when you consider buying a home in a poorer state like California or Hawaii. On the other hand, you can find some nice properties at much cheaper prices in places like Georgia or South Carolina.
Many real estate investors choose to find undervalued properties in new neighborhoods with great potential. Years from now, an investment like this can pay off big if the neighborhood becomes much more desirable and home values in the neighborhood go up.
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In addition to home value, consider other geographic factors that may make a particular property attractive to buyers.
For example, if you are investing in a single or multi-family home and intend to rent it to families with children, you want to make sure that the property is in a good school district, close to parks and areas- game , and at a reasonable distance from other entertainment such as movie theaters or amusement parks.
Unless you have $200,000 in cash in a money market account somewhere, you will need to finance your rental home purchase with a mortgage.
Mortgages can be a very scary but very useful debt, so let’s look at some details to make sure you find the right mortgage for you.
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Payment terms are generally higher for investment properties than for owner-occupied properties. This is because these mortgages are considered higher risk loans; You may not take care of the property because you don’t live there, and you may not be able to find a tenant to cover the mortgage payments, which could result in the loan being denied.
When you combine PMI with special loans like FHA loans, you can lower your down payment to around 3%.
But since PMI and FHA loans are not available for investment properties, it will likely be around 20% or higher.
Of course, interest rates are always changing, so you can wait until rates are favorable to you before applying for a mortgage, but keep in mind that the interest rate on a rental property will likely be 100 points, or 1%, higher than it. it would be on a building you live in..
Steps To Buying Your First Investment Property
If you choose to take out a 30-year mortgage, the payment will be lower because you have more time to pay. Of course, this means that you will pay more in total at the end of the mortgage.
If you choose a shorter term, such as a 15-year mortgage, you’ll pay more each month but less in total.
While being a landlord can be a great way to generate passive income and set yourself up for the rest of your life, being a landlord is a difficult and time-consuming profession.
If you’ve ever lived in a house (especially an older house, like one built in the early 1900s), you know that things break all the time.
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Sometimes there is a leak that causes damage to the floor or roof; sometimes there is a toilet that needs to be released; sometimes the air conditioner breaks, leaving the house very hot and the tenants happy.
So you have several different options when it comes to fixing a problem in your home.
If you’re lucky enough to be good at home repairs, this option can save you some money.
The problem is that many people don’t have the skills or time to go out to their property and fix the problem by hand…
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If you are not sure how to repair or repair an AC unit, calling a repairman may be your best option.
Although this option still involves taking time to find and coordinate a good expert, it will take much less time than solving the problem yourself.
Unfortunately, this option will be very expensive. You can expect to pay several hundred dollars for a typical repair, and parts can range from hundreds to thousands of dollars, depending on the severity of the break.
If you don’t have time to coordinate an appointment with a professional or want a completely hands-on landlord experience, a third option is available.
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By hiring a professional property management company, you can outsource all of your property management tasks to a third party.
As you might imagine, this option comes with a price, which we’ll discuss in more detail later in this article.
If you are buying a property with the intention of renting it out to tenants, chances are you want to make a profit on your investment so you can get some passive income.
While making a rental property a positive cash flow investment is a very achievable goal, it is not as easy as it sounds.
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You will have much more expenses than your mortgage payment, so your profit margin could be very small.
Your income from owning a rental property will naturally come from the rent paid to you by the tenants. This income is considered ordinary income for tax purposes.
So if you earn $50,000 a year from a full-time job and $12,000 a year from rental income, your total taxable income (before deductions) will be $62,000.
It may seem like a pain that rental income is taxed as ordinary income, but there are some serious dangers in owning a rental property that can lead to significant reductions. to tax.
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For example, your rental income is not subject to FICA taxes like income you earn from a full-time job. That’s already 7.65% less than you have to pay with your other income!
There are several types of insurance that you may or may need to purchase to protect your home and yourself, including homeowners insurance and homeowners insurance.
When something breaks (and it does!), you either have to fix it yourself (you may need to buy tools or parts) or hire a professional to fix it for you.
If you choose a property management company to take care of the day-to-day property activities related to your rental property, you will also have to pay them monthly.
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The typical property manager charges about 10% of the rent that the landlord charges tenants. So if you rent your property for $2000 per month, you must pay $200 per month to the property manager.
Property taxes in the US are ad valorem taxes, meaning the amount you pay is based on the assessed value of your home.
As a rental property owner, you must pay property taxes. Real estate taxes are paid monthly as part of your mortgage payment.
For example, while your entire monthly mortgage payment may be taxed, your mortgage interest is.
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When you combine these deductions with other deductions like depreciation, the taxable income of your rental property can decrease so much that you pay very little in taxes!
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