Investing in real estate is a time-tested way to build wealth.
This is especially true in residential real estate because beginning investors who choose wisely and utilize good property management procedures can expect the rental income to offset most of the costs of the purchase, including the mortgage, maintenance, and upkeep. New investors who are preparing to purchase their first rental home can use these four tips to help ensure the home they purchase is one that will reliably pay its way and help them build a successful real estate investment portfolio.
1. Learn about the local rental market before buying
The first and most important tip for those who are considering the purchase of their first rental home is to study the rental market thoroughly before attempting to buy. Talk with other investors, read local market news, and closely monitor the number of rental vacancies and how quickly they are filled.
This information will help new investors understand the level of rental activity in their area, what potential tenants are searching for, and which neighborhoods or areas have the highest demand for rental units. Gathering and studying this information will help rental home buyers narrow their search and avoid buying a home that will be difficult to keep occupied with good tenants.
2. Make sure the the first home purchase is affordable even when vacant
Another tip that is very important for new investors is to only purchase rental homes that they can comfortably afford to pay for in the event of an unexpected vacancy. While the goal is always to keep every rental home occupied by reliable tenants, investors must always be financially prepared to cover the costs of owning the home during any vacant periods.
Purchasing a home that will be unaffordable during a vacancy will only financially stress new investors and create unnecessary hardships – so if the home you’re looking at is in a competitive market, but does not have a particularly large pool of renters, you may want to look elsewhere.
3. Choose homes with good bones and no major repair issues
In addition to understanding the local rental market and staying within an affordable price range, new rental investors should also seek to purchase homes that have no structural flaws or major repair issues. Even though fix and flip reality television has made it seem like buying severely damaged properties and rehabbing them is profitable, buying a home with major condition issues is almost never a good idea for a new investor. Investing in homes that require major repairs will be far too expensive and time-consuming for rental home buyers who will need to see income from their investment as quickly as possible.
To avoid buying a potential money pit, prospective buyers should look for homes that can be quickly and easily readied for the rental market. Homes that need a fresh coat of interior paint, carpet cleaning, or minor cosmetic repairs are much better choices for a first-time rental home purchase.
4. Budget for professional property management
Lastly, buyers who are purchasing their first rental home should always budget for the use of professional property management. In many cases, their trusted real estate professional can either provide this type of service or refer buyers to another reputable provider. Professional property management services have successful methods to deal with many of the needs that new rental investors will have as landlords, including:
- comprehensive tenant screening practices to ensure that the rent will be paid on time and the home will be well cared for
- handling emergency service calls
- handling property maintenance
- reliably collecting and dispersing rental income
- marketing the rental to fill vacancies
- managing cleaning, inspections, and other services required to keep the property in rentable condition
To find out more about buying or managing a rental home, new investors should consider discussing their buying situation and investment goals with their real estate professional before beginning the purchase process.