If you\u2019ve never owned rentals before, you must understand four basic principles if you want to be successful :<\/p>\n
1. It\u2019s not your dream house.
\n2. Numbers matter.
\n3. Financing can be complicated.
\n4. You will make mistakes. That\u2019s OK.<\/p>\n
These quick tips will get you started and help you decide if you\u2019re ready to make money with investment property.<\/p>\n
1. Don\u2019t Be Emotional<\/strong><\/p>\n Buying your own residence involves your head and your heart because a home is more than a roof over your head. But leave your heart out of the decision when buying a rental. Features you love, such as a swimming pool or intricate garden, might become maintenance nightmares or big fat liabilities once tenants move in.<\/p>\n Buying the top-of-the-line home you\u2019ve wanted all your life also might not be the best decision. Renters can be hard on a home, and expensive, delicate fixtures may be early casualties. Understand that almost no one rents their dream home, and people expect to compromise. Most renters, according to Apartment Guide, choose for location above other considerations. It\u2019s smart to buy a rental with durable finishes even if they are less attractive than what you\u2019d want in your own home.<\/p>\n And speaking of location, you need to understand who you want your tenant to be before choosing a neighborhood. If you buy near a university, expect to rent to students. In a resort, you may cater to vacationers, and you\u2019ll have older tenants in a retirement community. You\u2019ll likely get families in good school districts near parks. Research your location to see what home prices and rents are, then run the numbers and decide what price you can pay and still make a profit. One-third of respondents to Apartment Guide\u2019s survey moved to be closer to their jobs, so proximity to large employers should probably be another consideration for you.<\/p>\n 2. Run the Numbers<\/strong><\/p>\n The property is beautiful, the price seems right, and you want to pull the trigger and make an offer. Or do you? One of the biggest mistakes new landlords make is buying property that loses them money every month. Don\u2019t make that error. First, decide how much you need a property to earn to make it worth buying. Then, calculate your return on investment.<\/p>\n Estimate the annual rental income of the home. That\u2019s easy if it\u2019s already rented. Otherwise, look for online rental estimates (many real estate sites have them) or check nearby listings for similar homes. In popular resort areas, your highest income might come from short-term rentals, while in other communities, you might prefer long-term tenants.<\/p>\n Next, get the figures for operating costs \u2014 landlord insurance, estimated maintenance and repair, property taxes, etc. There are many calculators online that can help you with these figures and determine if a property will make you money.<\/p>\n Don\u2019t forget to include a vacancy factor \u2014 many beginning investors make the mistake of assuming their property will be rented all the time. Make sure you have enough reserves to cover your mortgage and other costs when you don\u2019t have tenants.<\/p>\n Finally, don\u2019t forget to estimate property appreciation, resale value, and selling costs including real estate commissions. Before buying, research property price trends in areas you\u2019re considering. Is the area improving or declining? Are there new developments? Zoning changes? How is the local economy? A good real estate agent can be invaluable in providing important local information for investors.<\/p>\n 3. Understand Financing<\/strong><\/p>\n Financing investment property can be complicated. (Many experienced investors pay cash for houses, but newbies don\u2019t often have that luxury.) Most mainstream residential lenders won\u2019t approve loans for investment property to landlords with less than one year of property management experience or they won\u2019t allow new landlords to use rental income from the subject property to qualify for the mortgage.<\/p>\n There are a couple of ways to get around this requirement: You can finance a duplex, triplex or fourplex as a primary residence if you live in one unit and rent the others out, or you can finance with an \u201cinvestor cash flow\u201d loan. Investor cash flow loans use the income from the property to qualify you for financing, and many don\u2019t require landlord experience.<\/p>\n Investment property financing is riskier for lenders, so you\u2019ll need a larger down payment \u2014 at least 20%. And you\u2019ll pay a higher interest rate than you would for a traditional residential mortgage. If your rental property has more than four units, you\u2019ll need to apply for commercial residential financing.<\/p>\n Finally, don\u2019t forget about 1031 exchanges. Legal in every state \u2014 from Florida to Alaska \u2014 1031 exchanges let you defer capital gains taxes from the sale of an investment property by using the proceeds to purchase another investment property.<\/p>\n 4. Expect Mistakes<\/strong><\/p>\n New landlords make mistakes. A recent MoneyGeek survey of real estate investors, property managers, attorneys and brokers found new landlords make these top mistakes :<\/p>\n 1. Failing to screen tenants Most mistakes are the result of ignorance. Fortunately, you don\u2019t have to learn the hard way. You can protect yourself from most legal missteps by hiring a professional property manager, a real estate attorney, or whatever you need to fill in the gaps of your knowledge and experience. Experts can keep you out of trouble until you learn the ropes.<\/p>\n Another way to gain knowledge without mishaps is to invest with an experienced partner. You divide the income, but you also have someone to share costs with. The right partner will be willing to provide education in exchange for you taking on more of the legwork, a bigger share of the costs, or some other compensation.<\/p>\n
\n2. Under or over-pricing the rental
\n3. Assuming there would never be a vacancy
\n4. Overestimating rent and underestimating maintenance costs
\n5. Violating landlord tenant laws<\/p>\n