How is life since graduating? You have the qualification that you worked so hard for, but how about the career that you dreamed of? What about the paychecks that you anticipated?
Chances are that life hasn’t quite gone the way that you expected. Debt is looming and you are wondering how people ever afford to enjoy the kind of lifestyle that you dream of. Reality can be a sobering experience. But, there is a potential way to escape the stress and build your wealth in a relatively fast and secure way. You may have heard stories of people in your position choosing to invest in rental property. Have you ever considered becoming a landlord yourself?
Perhaps it has crossed your mind, but the question of ‘how’ has kept you from investigating further. We want to show you that investing in rental property is something that many people really can do. With interest rates at an all-time low, and rent costs staying high, it is the perfect time to get involved. This guide will take you through the 5 steps you should follow to obtain finance, find a property, and of course a tenant.
Take a look at the area in which you would like to purchase a rental property. You need to know the demographic of the people living there. Look out for popular schools, local amenities, and evidence of industry investment in the location.
You should also investigate the types of properties that are available to rent, and the kind of money that they are bringing in each month. Compare this with the average selling price to give you an indication of whether investing in the area would be profitable for you. You can take the research as far as you feel comfortable. Some new landlords even visit rental properties posing as a tenant to get the inside scoop on the local market.
The information that you gather will help to shape your thoughts on the best type of investment for you in a given area. Of course, what you can afford will also impact your choices. You may have an idea of the kind of property you would like to invest in, either a family house or unit, for example. From this position, you can start to formulate a plan and decide on the amount of return on your investment you are hoping for. It is essential to be clear about this, because aside from the mortgage repayments, you will also be required to pay taxes, maintenance, and utilities. From here, you are ready to look at the financing options that are available.
Once armed with research, many people feel motivated to search for the perfect rental property in which to invest. We urge you to hold off on that step, until you have taken the time to investigate your financing options. Do this before you find the house as it will save time and ultimately heartache!
Take a look at the many mortgage options that are available for rental properties. They will be somewhat different from the choices for home owner mortgages, but are still attractive to investors.
There are many options for actually financing an investment property, and the one that you opt for will depend on your personal circumstances. Here is a breakdown of some of the most popular financing choices for rental property:
- All cash - This is where an investor uses their own cash to finance real estate purchases.
- Mortgage - In this case, investors pay a cash down payment to secure a property, and then pay monthly mortgage payments
- Portfolio lenders - These are a variation of mortgages that are able to offer more flexible terms compared to traditional mortgages
- Federal Housing Administration (FHA) loans - These are designed for homeowners who will live in the property that is being purchased, but there is a loophole that allows an FHA-financed home to have up to 4 units. This could therefore work well if you are planning to live in one unit of a complex that will also contain your rental property
- 203K loans - These loans allow the investor to include the cost of home repairs and improvements into the loan amount
It makes sense to seek advice from an expert, who will help you to decide on the right choice for you and guide you through the entire process. The key thing to note is that there are many options available to suit a wide array of budgets and circumstances.
3. Search For Properties
Once you know what you are looking for and how you will afford it, you can commence your search for your dream rental property. You should have a clear idea of the kind of property that you are looking for, the essential elements that it must have, as well as your budget for upgrading the facilities. This will help you to cut through the noise and keep you on track with your plan.
Check out online listings, such as realtor.com, which promises to be “the most complete source of homes for sale & real estate near you”. You should also connect with real estate agents, who can offer great insights into the local property market.
Once you find the right property, at the right price, it is time to make an offer. If you are using an agent, your realtor will complete the offer paperwork and submit it to the seller’s agent. This will be passed on to the seller and negotiations will commence.
You should have a very clear idea of what you are willing to spend on a particular property, so remember to keep your head and stick to your limits. The purchasing point is the moment that determines the profitability of your investment. Be willing to walk away if the price is not right.
4. Final Checks
Once the offer has been accepted, the next step is to be sure that you are making the right choice by hiring an inspector to perform a complete condition inspection on the property. It is essential that any defects that may cost you money in the future are uncovered so that you can account for that.
This is also where ‘Due Diligence’ comes in. You need to be sure that your investment is not only based on ‘pro forma’ financial information - which is little more than an estimate of how it should perform. You need to know the property’s actual performance, which involves analyzing bank statements, rent rolls, and tax returns of the seller.
Only when you have access to this information, and are able to digest it and agree that you are making a sound judgement in your investment, should you proceed.
5. Find A Tenant
Once the legal process is complete and the closing date arrives, you will receive the keys as the proud owner of a rental property. But that of course does not make you a landlord! This is the time to start the process of finding a tenant.
Once again it is essential to complete this step properly to prevent stress and financial losses. You want to protect your investment, so finding the right tenant is imperative. Your first landlord duty should therefore be to put together a robust tenant-screening process, which should include an application process, plus background and credit checks. It is essential that you do not skip over this part and rush to get someone in the property so that you can start to receive rent.
Unfortunately, many of the horror stories that landlords share about nightmare tenants are true - but you can do a great deal to prevent falling victim to these issues yourself with a thorough screening process.
One Step At A Time
Although these five steps can feel daunting when you stand at the start of the process, each part is manageable, and your goal of becoming a landlord is definitely within reach. With so many wonderful online resources, professional support, and experience around you, this is one of the best times to invest in rental property.
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