Investing to rent can create the financial and real estate success you have been searching for, but it takes hard work, thoughtful preparation and practical knowledge. As a landlord you must be creative, fearless and intuitive. In the Tidewater area approximately one out of every five homebuyers is making an investment as well, whether it’s in a second home, rental unit or a condominium for a child attending college.
In all of these circumstances you must look realistically into the future about finances, home maintenance and upkeep.
Choose Your Location Carefully
The first consideration when buying real estate for rental property is what area or region will work best. Research the area of your choice thoroughly. Check the local papers and learn about the types of rentals advertised and the average monthly rents. Talk to several real estate professionals, including property managers, and find out the average length of time a rental unit stays on the market before tenants move in. These professionals will also have insight into which locations are more desirable and what types of rentals are the hottest.
For many first time investors a smaller property is the best way to begin and it is very beneficial to hire a trustworthy and competent property manager. Read my article “Property Management: The Good The Bad And The Ugly” to learn more. Once you are a seasoned landlord you can expand your vision to include larger properties. If you are buying a condominium or townhouse be certain to review the Home Owner’s Association (HOA) rules in regards to rentals with your real estate agent. The HOA often has limitations on the percentage of homes that can be used as investment rentals.
Mortgages and Rents
Once you have researched and chosen the perfect area think clearly and carefully about the type of mortgage you are qualified for. In order to purchase real estate with the intention of renting you must be certain the rents you charge cover the mortgage. Know the current rental trends and think of how your rental property will hold up in comparison. If a property’s rent is advertised above the average the property may not rent and become stale. Once stale, potential renters often have the impression something is wrong with the property.
Remember, if you purchase a property that was a rental in the past and put 5 to 10 percent down the mortgage may be too high. Investing more money, as a down payment, will lower the mortgage. As a landlord you want to have a positive cash flow, it is essential to make some profit each month, even if the profit fluctuates. Ask the current owner to review the rental history of the real estate with you. When you purchase property with more than one rental unit the mortgage you qualify for is based on the rent of the previous three years. As a buyer and new landlord the rent you charge is based on the current leases you inherit. These leases remain in affect until their renewal date.
Investing In The Future
Always buy rental investment property with the idea of re-selling in mind. When you invest in rental property you need approximately three or four months mortgage payments in reserve to cover repairs and to procure new tenants if necessary. Plan for the cost of advertising and the time of showing the rental if you are not using a property manager or real estate agent. Think realistically how much work, money and time you must invest. Always fix smaller problems, as they occur, to avoid more expensive repairs in the future.
Renovations and upgrades can also increase the return on your investment. To learn more about the types of renovations and upgrades that can increase your profitability read my article “Renovations and Upgrades: Bring It To The Bank“. Maintenance of rental properties is incredibly important. If the property is distressed, later you will not sell for top dollar and get the highest return from your real estate investment. Real estate investment requires trusted, professional real estate advisors and planning for the future. These tools help you reach your investment goals and you can bring your real estate investment success to the bank!