9 STEPS WHEN BUYING A RENTAL
by: Remie Longbrake | published: March 13, 2022
Buying a rental is not for everyone. There are however benefits to buying properties and renting them out to others. With all investing, it’s important to do your home work, as there are no guarantees to profitability. Use these steps to help find your first property, or one of several to come.
1. Figure out where you want to buy
The easiest way to find a property is your own back yard. You likely already know the area well, understand the neighborhood, and after it’s rented, you can keep an eye on the property.
Sometimes however, prices are out or range for what you can afford. This is true in a lot of suburbs of major cities in the U.S. and regionally as well. Where you live just might not have homes that are affordable. If that’s the case, typically you should try to find a rental property within a 2 hour drive, if not closer. For the most part, you should be able to find something within that range, and it’s close enough that you can drive to as things come up.
2. How much can you afford
Really the second part to consider is how much you can afford. A lot of times this alone will determine where you can invest. Prices vary all over the country, so you might need to expand your search area to find something you like and makes since financially.
It’s important to get pre-approved for a loan, if that’s the route you’re taking. It also might makes since to use the equity in your home to pay for the down payment on your rental. You could refinance. You could also take out a Home Equity Line of Credit (HELOC). Helocs can be a great tool, but you should be careful. Banks are notorious for limiting your credit line as they could call the loan and want their money back. And if you have it invested in your property or used to buy a furnace, that could be tough.
Another avenue to financial is using private investors, also can be referred as cash investors. This could be family or someone you meet that invests in real estate and understand it’s risks. In many cases cash investors have higher interests rates than typical banks, so you should be careful and know the terms. In many cases they would want their money back in shorter time frames; could be 90 days, so understand their requirements. Therefore in many cases these cash investors look for flipping properties rather than long-term rentals. If you lay the terms out correctly and both parties understand the requirements, it can be a win-win. Essentially, there’s many ways to find money that can make sense for the right opportunity.
3. What condition of the property
As you start looking for rental properties, you should have an idea on what you’re looking for. The pristine, no-work-needed type properties are going to be going for the highest and go the quickest in most cases. You’re also competing with buyers who can be more emotionally attached to a home then you should be, since you’re main focus is the area and do the numbers allow for a profit. You can’t afford to pay extra necessarily. It might make sense to step down your requirements, look for homes that may need light TLC done. You should probably stay away from homes with major issues, like foundations, drainage, and roof issues unless the numbers work, but even then costs can get out-of-hand quickly. Light work could include outdated kitchens, bathrooms, paint, minor drywall work, and stuff you can likely do yourself. If you’ll need to depend on a contractor, realize they are in high demand and that could take months. And if your rental isn’t move-in ready you can’t move a tenant in.
4. How much time do you have
Another thing to consider is how much time do you have. We only have so much time each day. If you plan is to buy a home that will need some work, how long is that work going to take before you can move a tenant in and start making money. You can hire most anything done, but that cost money and time possibly, depending on the nature of the work needed.
Once you move the tenant in, how do you plan to take service calls. If you’re working during the day, it’s probably not possible to stop what your doing and go fix their issue. Emergency type stuff will come up, especially clogged toilets, but so can hot water issues, furnace, A/C, and about anything. You should have a plan and be ready for these problems the best you can.
As you scale and perhaps buy more properties you might want to hire a property manager who can takes these calls on your behalf. Plus they will collect rents for you, which can help save you time. Starting out, that’s probably not practical. Plus they don’t come cheap, usually rates can very from 5% – 20% of the rents being collected.
5. Taxes, fees and other fees
Don’t forget to look into property taxes, it’s often overlooked. Additionally, make sure there is not a lien on the property which does happen. Sometimes, a lien can work in your favor, so just understand what your options are. Also, some housing is a part of an Home Owner’s Association (HOA), and those fees can add up considerably. If there is an HOA, check into this. Get a copy of the bi-laws, understand your rights and what you can do after you buy. You might be surprised there could be many restrictions to construction you may want to do, color of the house, yard, etc.
6. Do the numbers work
At the end of the day, really what’s important is if financially the numbers work in your favor. Before signing, you need to be sure that you can make money. At it’s core, you need to be able to charge the tenant more then what your loan will be and other expenses added in. This includes the costs of improvements to get rental ready. Figuring in taxes, HOA fees if applicable, insurance costs. It would also be good practice to factor in costs for improvements over time. Say the roof is fine now, but it’s a 25 year roof and it has maybe 5-7 years left. Factor that new roof cost into your charges to the tenant. Waiting till that roof need replaced then paying for that yourself is a huge expense. You should be charging for that now and setting that money aside, perhaps in a interest-bearing account, that way when it’s ready to be replaced you can use this money rather then taking out a loan, accruing interests, then trying to increase rents on the tenant to recover your money. Taking all this into account can sometime make finding a property difficult, however, business is difficult and that’s what this is. You gotta be solvent and plan ahead the best you can.
7. Determine who is buying
Starting out, you’ll probably buy the rental in your own name, however it would be wise to consider buying that rental through an LLC or a trust that you set up. Naturally, you would need an attorney, which adds to the costs, however this step can add valuable liability protection when it’s structured right. It might also have benefits with taxes.
If you have partners, you might want to consider a partnership type structure, as there’s options there, such as S-Corp, C-Corp or LLC and others. If you’re domiciled in one state but have rentals in others, that can open other liabilities risks, so it’s best to consult with an attorney who specializes in real estate specifically. When you’re just starting do weigh your options. Last thing you want is an angry tenant, partner, or investor who has intent on destroying what you’ve built.
8. Inspect before you buy
Once you find a property be sure to get it inspected. Sometime this will be a prerequisite before closing, however it’s important to do regardless. Sometimes buyers shy away from this step because the current owner is getting other offers or the home just looks great on the surface. You would be surprised what pops up in the inspection. Most often it’s related to electrical, non-GFI outlets come up. Sealing issues around windows, chimney stacks, and curling shingles. Of course, the inspector should also be checking the furnace, hot water tank, well pump, septic if applicable, insulation thickness, foundation and more.
If the report come back with suggestions, you should take that into consideration. The seller likely is aware of these issues already. You can counter-offer if the numbers still work calculating these improvements into your bid. Be prepared though, have documentation showing comparables (Comps) in the neighborhood and the selling prices. Sometimes the comp data will be in your favor and sometimes it won’t, but it’s good to have, that way you know the bid you place is appropriate and works for you and what you’ll need to stay profitable.
9. Have patience
If all else fails, be patient. Don’t be rushed to find a rental property that the number won’t work. Eventually, something will come about, however, that might take being resourceful. You can lean on relationships, talk with realtors that understand what you’re looking for. Let them help you be extra eyes on the ground. Network with other investors locally and regionally who can help too. It’s unlikely that everyone is looking in your neighborhood, so it’s usually mutually beneficial to help each other.
Foreclosure properties can be an opportunity. They are not without risks though. Usually these are sales are done at your local courthouse and these properties can go very reasonably, but not always. Also, in most cases sales are final and as-is. There is no negotiating done and no inspections to rely on. If you know the property ahead of time, which you should, you might be able to do a drive-by and see property for yourself, but not always. So there are more risks involved here.
In closing
It’s best to consider that being a landlord is what you want. It’s not easy and not without risks, however the upside can be rewarding over time. Renting properties to others is a great responsibility and should not be taken lightly. Always be helpful to your tenants, within reason, and always follow the laws set forth. When it comes to finding your property do lots of homework, study the market you want to buy in and try to make sure over time you can increase rents as prices climb so you can stay profitable.
It is our recommendation to always consult with a licensed and reputable financial expert. This educational article is not specific advice. We strive to present quality, effective content. For specific references to our content please use our contact page.