It’s a decision that you’ve pondered over for months, maybe even years. You’re excited by the thought of passive income and investing in real estate. You’re finally ready to become a rental property owner, and buy your first rental property!
This is quite an exciting time, but as is true with any new endeavor in life, there’s a steep learning curve. Our non-recourse loan lenders have compiled some tips from current rental property owners to help you in this process. These are the things they would tell themselves if they were just starting out, and hopefully, these tips can help you.
Buy as though it’s your next house.
When you’re looking for a rental property to purchase, you should go through the buying process the same way you would if you were going to live in this home. Thorough inspections and thinking about this property in the long term are crucial.
If there are major issues with the property, such as cracks in the foundation or rotting wood, you should probably pass on the house — unless, of course, you’re comfortable paying to get it fixed. As a property owner, you could be liable for issues with the property that affect your tenants (such as repercussions from mold, asbestos, or lead pipes). The bottom line is, if you wouldn’t buy this house for yourself, you shouldn’t buy it for others to live in.
Cheap is not the answer.
It’s easy for rental property owners to outfit their places with cheap appliances, carpet, etc. After all, you just spent a lot of money on acquiring this property — having to throw down more money seems like too much.
As one rental property owner explained, “Your renters aren’t going to take care of stuff — either because they don’t know how to or because it’s not theirs, so they don’t care.” If your property is lived in for months to years at a time (versus a vacation rental which doesn’t have as consistent foot traffic), cheap things are not going to weather the storm.
When you’re planning for renters, you need to budget for durability. If you don’t, you can plan on having plenty of phone calls about the dishwasher breaking down once again, or issues with the lock on the door, or having to replace the A/C unit for the second time in four years. The saying is true: You pay for what you get.
Don’t overlook the look.
Way too many property owners get sucked in to rehabbing their property. They spend thousands of dollars trying to fix things and salvage others while making up for the shortcomings of the house, and they forget the importance of having a property that functions great and looks great as well.
Your kitchen tile that’s a work in progress is not going to appeal to potential renters, even if you let them know it’ll be finished by the time they move in. Your property is nothing without renters, so you need to sell potential renters from the get-go. Invest in making your place look great, buy a higher-value property that doesn’t require nearly as much work (if any at all), and spend the time and money needed for quality photographs that properly demonstrate your property’s value.
For a first-time property owner, taking on a multi-unit place is quite the challenge. It’s not impossible, but it can be nice to get your feet wet with something a bit more manageable, like a single-family unit. This will help you get an understanding for how owning a rental property works, and should you choose to expand and invest in other properties, you’ll have the experience needed to do so.
Think and plan around being cash flow positive.
Your rental property can either be an asset or a deficit, and if it’s going to be a deficit, you’re better off with not investing. All decisions with your rental property should be planned and thought out with a cash flow positive mindset. You’ll need to leverage a lot of expenses with how much you’re going to be making each month — plan as much as you can of this before you begin investing.
Here are some initial things to consider:
- How much do you need to spend on the down payment, as outlined in the agreement of your non-recourse loan?
- What will your monthly mortgage payment be?
- What are all the upfront costs that you’ll need to cover?
- If you’re working with a property management company, how much will this cost?
- What do you anticipate being annual expenses (such as HVAC checks, plumbing problems that might arise, etc.)?
Once you’ve calculated these expenses, you can start to think about what you’ll need to be making each month in order to offset the difference, and to come away with a profit.
Do your research.
Talk with non-recourse loan lenders, listen to podcasts, look into finding a mentor (but make sure you can also provide something of value to them), read the latest blogs and articles, stay up to date on current housing market trends, and do anything and everything else to ensure you know the industry that you’re about to embark upon.
Bigger Pockets is a hub for real estate investors, and is full of educational resources and forums for you to learn from. They also offer a podcast, and there are countless other podcasts you can rely upon for tips and solid information. Additionally, you should find someone who’s rented out properties and can offer you some guidance. You can never learn too much about a topic, and finding out both the good and the bad for real estate investing is essential to help you be prepared.
Work With First Western Federal Savings Bank
Our non-recourse loan lenders have helped countless real estate investors for nearly 40 years. We would love to work with you and help you on your path! Real estate investing is one of the best markets you can get into, and if this is your first venture, we wish you luck. Whether for a vacation rental property or a long-term tenant rental, your success starts with First Western Federal Savings Bank. Apply with our non-recourse loan lenders today!