Real estate is one of the best types of investments that you can have. It can provide great ROI, the inventory is abundant, you can receive tax advantages, and it’s a great way to diversify your investment portfolio. If you choose to go through the landlord route, investing in rental properties can provide you with stable cash flow and help you invest in other asset classes.
However, no investment comes easy. If you want to maximise the power of your money and avoid the common pitfalls along the way, here are some tips to keep in mind when buying your first rental property.
Make a debt in personal debt
If you still have many other debts to pay, buying a rental property may not be the wisest choice for you. Some seasoned investors might carry debt as one of their investment portfolio strategies. Still, as a beginner, it is better to pay down your debt before taking on another large financial responsibility.
Just like when buying a house for personal use, it is highly advisable to get pre-approved before looking for potential rental properties or quality land for sale. Getting pre-approved ahead of time will allow you to make an offer quickly when you find a prospective property, which can help you beat other buyers considering the same home. Not only that, but a pre-approval can also tell you exactly how much of a loan you can take out, which can help you narrow down your choices much easier.
Prepare for the down payment
Most lenders require larger down payments for investment properties compared to owner-occupied properties, usually at 20%. This is mainly because mortgage insurance is not applicable for rental properties. That said, you have to secure a large amount of money to put down at least 20% on a house. You can do this by using your personal funds, working with a hard money lender, or acquiring a personal loan from a bank.
Shop around for lenders
Similar to the down payment, mortgage interest fees are also higher for investment properties. Shop around for potential lenders that can offer interest rates that won’t consume too much of your returns. It is also a great idea to consult with more experienced rental property investors for advice; they may even point you in the direction of a lender that offers the lowest interest rates for rental properties in your area.
Consider more than just the upfront costs
Aside from the upfront costs (down payment, inspection fees, lender’s mortgage insurance, etc.), you also need to factor in outgoing costs into your budget. These include repairs and maintenance, vacancy expenses, strata fees, council rates, loan repayments, and land tax, among other expenses.
Obtain landlord insurance
Landlord insurance will provide you with coverage for property damage, loss of rental income, and theft, among other things. It can also protect you against liability in case a tenant or guest sustains an injury caused by property maintenance problems. However, avoiding possible causes of injury is still an important role of a landlord.
Steer clear from fixer-uppers
Unless you are a fix-and-flipper, avoid fixer-uppers at all costs. The idea of fixing up a cheap property may be tempting as it has the potential for high ROI, but as a first-time investor, it is better to choose a property that needs little to no work to become ready for tenants. But if you know a contractor that can do the work for cheap or if you can do the work yourself, go ahead and consider buying a fixer-upper.
Like with any other investment, it is highly advisable that you start small with your first rental property. At the beginning of your journey as an investor, things tend to be rocky. Hence, having a small investment at first can protect you from large financial problems in case something goes wrong.
Study the law
As a landlord, you will have legal obligations to your tenants, especially when it comes to rent, maintenance, and eviction rules. Before investing in a rental property, make sure that you know the landlord-tenant laws in your state and city/town. Doing so will help you avoid legal trouble in the future and potentially save you from a very costly lawsuit.
Investing in rental properties can make for a very lucrative business in real estate. If it is your first time buying an investment property, keep these tips in mind so that you can avoid the common mistakes for beginners—and, more importantly—maximise your investment down to the last dollar.