WRITTEN BY: Tricia Tetreault
Published March 11, 2020
Tricia has nearly two decades of experience in commercial and federal government lending. Her expertise is highlighted throughout small business loan content on Fit Small Business.
Buying rental property is a significant investment and can be a lucrative one. However, take it from the professionals that you’ll need to take some precautions. Do your research, take your time, and read the tips we have provided from nationwide pros in the real estate industry on buying your first rental property.
Here are 31 tips for buying your first rental property from the pros.
1. Use Leverage to Buy the Property
David Reiss, Professor of Law, Brooklyn Law School
Potential real estate investors should make sure to understand the mortgage market. If you get the right mortgage, it could help keep your costs low and reduce uncertainty about the property’s cash flow. Using the leverage of a mortgage will free up some of your cash so that you can save it for repairs or a future investment. However, a mortgage can be a double-edged sword since there will be financing costs associated with it, so it’s always best to consult with a professional.
2. Invest in Turnkey Real Estate
Christopher Linsell, Staff Writer and Real Estate Coach, The Close
When looking for the right rental property to purchase, investors face the classic dilemma: go with a property that needs a lot of work but could have a higher rate of return or go with a lower rate of return turnkey property with all the cashflow systems already in place. With a turnkey rental property, you’ve already got a property in great shape, a property manager and tenants lined up. If you aren’t sure where to find a turnkey property; Roofstock can assist you with your search, allowing you to browse properties in up to 40 different rental markets at a wide range of price points and invest in the rental that is right for you.
3. Line Up Your Financing Early
Michael Cetera, Divisional Managing Editor, FitSmallBusiness
If you’ll be using a mortgage when buying your first rental property, it’s important to weigh all your financing options carefully. Should you choose a 15- or 30-year mortgage? A fixed rate or adjustable rate? To better weigh the true cost of your financing options, first-time investors can fill out a short form on LendingTree and let multiple lenders compete for your loan. Its online marketplace enables you to compare rates and offers quickly to find a good fit.
4. Invest in Single-family Homes First
Kathy Fettke, CEO, Real Wealth Network
Invest in single-family homes first since it’s the simplest way to get started as a new real estate investor. The upkeep is easier than multifamily or commercial properties. With only a single tenant, there doesn’t tend to be as much wear and tear on the property and, when something breaks, you’ll only need to fix one thing.
5. Invest Enough to Be Cash Flow Positive
Richard Haynes, Broker & Owner, Manhattan Pacific Realty
First-time rental property buyers should only buy a property that cash flows. The best way to limit your risk and increase your odds of success is to make sure you are putting enough money down to be cashflow positive. There will be unexpected expenses, so leave a margin for error. It also enables you to weather tough economic times. If the property cash flows, the fluctuations of the market are less relevant, and you can hold it for the long term.
6. Focus on Your Return on Investment
Iris Felder, Luxury Sales & Rental Expert, The Capone For Your Home Team
Invest in an area that will get a high return on investment. A cap rate of 7% or greater is ideal. You can find some amazing deals in locations that are transitioning or in gentrified areas. To obtain the highest return on investment, you will need to know the area and what houses are selling for in the neighborhood.
7. Know Your Marketing Strategy
Stephen Fox, Co-founder, Upkeep Media
If you’re investing in a rental property that’s currently vacant, it’s crucial you find quality tenants as quickly as possible. Before purchasing your rental property, make sure you know your plan of attack for marketing the rental property. A vacant rental property can quickly eat at your cash flow. The best places to advertise your rental property are going to be major online real estate marketplaces.
8. Buy What You Know
Jeff Miller, Co-founder, AE Home Group
Invest in a rental property in an area and niche in which you are familiar. Draw from your previous life experiences to gain a competitive advantage. For example, if you’re retired military, then buy a rental property near a local military base for military transfers. If you’re a college alumnus, then buy a student rental near your university’s campus. If you’re a nurse, then buy a rental property for short-term nurses near your hospital.
9. Have a Written Lease in Place
Jessica Dolan, Home Organizer & Stager, Room to Breathe
Have a very clear lease in place with all the details written out so that there’s no confusion about the tenant’s expectations. The lease should include when the payments are due, what the lease termination fees are, and if pets are allowed. The lease should also include what cleaning the tenant is required to do and if the heat should be left at a certain temperature during the winter.
10. Screen Prospective Tenants Thoroughly
Tricia Tetreault, Small Business Finance Staff Writer, FitSmallBusiness
Properly—and thoroughly—screening potential tenants is vital to making your first rental property a success. Companies like MyRental offer a free online application for tenants and a monthly subscription for landlords to verify previous addresses, criminal backgrounds, and eviction history. With tools like these, there’s no excuse for not properly vetting prospective tenants prior to renting to them. This simple step can save you from leasing your rental to someone with a questionable history.
11. Talk to the Neighbors
Don Tepper, Investor & Real Estate Agent, Solutions 3D
Knock on the neighbors’ doors and talk to them. Explain that you’re considering buying the property and would like to know if they’ve had any difficulties with the tenants or the owner. While you’re there, drive around the neighborhood and check out the property during the day, the weekend, and in the evening to see what the neighborhood is like.
12. Work With a Property Management Company
Katie Messenger, Real Estate Agent, Keller Williams
Think realistically about your time. Do you have the time or desire to answer calls at 2 a.m. for a furnace that stopped working? If the answer is no, then consider hiring a property manager. Like a real estate agent, you’ll want to interview different companies to determine if their services and fees are worth the investment of not having to do background checks, take maintenance calls, and interview tenants yourself.
13. Purchase a Property With Outdoor Space
Tom Davies, Co-founder, Accelerate Homes
A huge percentage of prospective renters want to enjoy a cozy area where they can invite friends over or spend time on their own relaxing. Generally, most tenants aren’t picky about the type of outdoor area but want it to be private, usable, and an area where they can put their personal touches on it with plants, furniture, and decorative lighting.
14. Buy a Multifamily Property You Can Live in
Dan Green, Founder, Growella
For investors willing to live in their multifamily investment property, an FHA mortgage provides the best combination of interest rate and down payment size. For two- to four-unit properties, Federal Housing Administration (FHA) mortgage rates are roughly 1 percentage point lower than a comparable conventional rate, and the required down payment for the FHA is just 3.5 percent as compared to 25 percent or more.
15. Accept Rent Payments Online
Dennis Shirshikov, Small Business Finance Staff Writer, FitSmallBusiness
Experienced landlords have heard countless—and often very creative—stories of how a tenant’s rent payment ended up being late. To help mediate checks getting lost in the mail, eaten by wild dogs, or blowing out the car window on the way to the mailbox, you can set up online rent collection. With online payment, there are no excuses. Your tenants can pay you instantly with the click of a button and even set up regular automatic payments. Companies like Avail offer online rent payment as well as full property management software for landlords, helping them market properties, screen tenant, organize leases, and schedule maintenance.
16. Invest in a Vacation Rental Property
Rob Stephens, General Manager, Avalara MyLodgeTax
Evaluate a potential vacation rental property and look at comparable rental rates on sites like HomeAway and VRBO. In general, real estate will increase in value over time, but certain markets will experience greater appreciation. Evaluate how the market has performed historically and identify areas of growth that can lead to greater returns. Additionally, ensure that the zoning laws and boundaries in the area allow you to rent out your home to guests.
For more information, you can read our ultimate guide on buying a vacation rental property.
17. Buy a Property Near Apartment Buildings
Jeff Rohde, Founder, J Scott Digital
Buy in an area where there are a lot of apartment buildings. There’s a proven demand for rental properties in areas with apartment buildings since renters are always looking for a place to rent that is a move up from a typical apartment. You will be able to meet that demand and rent out your property without spending as much on advertising costs.
18. Balance Your Risk
Stacey Corso, Senior Communications Manager, HomeUnion
While real estate values can fluctuate, people still need a place to live when the economy experiences a downturn, which provides investors with a steady income from rental properties. This is why savvy investors understand the unique value of choosing the right passive rental property to balance out your risk. Always look for areas that will have high rental demand, even during downturns.
19. Look for Properties Nationwide
Nancy Brook, Broker & Investor, Billings Best Real Estate
Consider buying properties in other parts of the country. You may be able to find a property that is much more affordable and provides a much better return on investment. If you go this route, you will want to find a great real estate agent and property manager in that market.
20. Use Your Retirement Funds for Your Real Estate Investment
Melanie Patterson, Real Estate Investing Staff Writer, FitSmallBusiness
If you have savings in an IRA [individual retirement account] or a Solo 401(k) plan, don’t limit your investment options to only stocks and bonds. Use a self-directed retirement account through a provider such as Rocket Dollar to diversify your portfolio and invest in real estate, including buying your first rental property. This is a good way to take advantage of tax-deferred retirement funds and get into real estate investing while staying IRS-compliant. Rocket Dollar can get you set up for a $360 registration fee plus $15/month. Schedule a free call today to learn more.
21. Know the Rent Control Regulations
Lisa Krause, Real Estate Agent, Keller Williams
Be familiar with the specific rent guidelines in the municipality where you are purchasing. The guidelines explain the process for registering the amount of legal rent and how to determine the annual rent increase you can pass on to the tenant. In certain situations, you can apply for additional rental increases like vacancy decontrol or a one-time capital improvement allowance. Knowing up front how much you can charge for rent helps you determine your investment.
22. Get Advice From Other Landlords
Corey Vandenberg, Mortgage Broker, Platinum Home Mortgage
Finding and keeping good tenants is an art all its own. Join a local landlord association or ask someone who has been a landlord for a while and get advice on what to do and what to avoid. This type of information will help you avoid pitfalls that could ruin your first time. Happy renting starts with being well informed.
23. Have Property Inspections Performed
Dean Myerow, Bond Professional, Las Olas Wealth Management
Have a professional perform a radon gas check if you are buying in a part of the country that traditionally might have radon coming up from the foundation. You should also have a sonar scan of the ground outside done if it is an old house and might have an unknown oil tank buried. You don’t want to buy an instant liability if one exists, and it is leaking.
24. Buy a Rent-ready Property
Seth Lejeune, Real Estate Agent, Ask Seth Anything
Try to find something that is more or less rent ready. Getting into the investing business doesn’t have to be complicated, but it can be if you buy something that is a total rehab. Unless you have experience renovating houses, find something that is turnkey and can cash flow out the gate. Otherwise, you could get way behind the 8-ball when it comes to renting the property. Never forget the purpose here is to get the thing to produce income.
25. Choose a Location Near Amenities
Alexandra Axsen, Owner & Managing Broker, Lake Okanagan Realty Ltd.
Pick a location close to public transit and amenities. Rental properties near universities are ideal locations as most students will rent for the four years they are in university, and their parents will usually provide personal guarantees on the rent.
26. Choose a Property That Is Ideal for Your Target Renter
Mark Painter, Founder & President, EverGuide Financial Group
Buy a place and make improvements that cater to the typical renter in that area. You can get the most value by targeting the correct renter in your area like students, young professionals, families, retirees, or vacationers. If you buy a house that would be ideal for families in an area that is predominantly rented by students or young professionals, there is a good chance you are not maximizing value.
27. Do a Pro Forma Analysis
Shane Lee, Data Analyst, RealtyHop
Do a pro forma” analysis on the property you’re looking to buy. Look at similar properties in the same area, how the rents have changed in the past 10 years, and how they are projected to change in the next 10 years. Once you have the projected rent growth and estimated cost on operations and maintenance, you will have a better understanding of how much net income the property would generate, and how much you can make if you were to sell it.
28. Pay Attention to Economic Cycles
Steve Pollack, CEO & Co-founder, Anchor Loans
When planning for your investment strategy, pay attention to economic cycles. The recession stage is the best time to buy, but can also be the scariest since typically, inflation and unemployment are high and demand for rentals decreases. With all of those risk factors considered, this is also when the property will probably be the cheapest. When the economy enters into the recovery phase, vacancies decrease, and rental rates start to increase. The peak phase includes the expansion and contraction stages. Key indicators of the contraction stage include an increase in new projects, rising inflation, and increasing interest rates. Some markets will see increased vacancy rates and a leveling off of prices. Understanding these indicators will help you know how to take advantage of market timing to make the wisest investments.
29. Be Aware of Short-term Rental Restrictions
Roh Habibi, Founder & Principal, The Habibi Group
With the increase in short-term rental companies like Airbnb and VRBO, many cities have put into place short-term rental restrictions. Your condo association or homeowners’ association (HOA) may have their own restrictions too and may not allow short-term rentals under 30 days. Be aware of any laws and read your HOA agreement before you buy a property to ensure it can be used as a short-term rental.
30. Factor in Absorption Rate
Emile L’Eplattenier, Managing Editor, The Close
Absorption rate, a measure of how long it will take for all the available homes or rentals in a given area to sell or rent, is an important consideration when buying in new neighborhoods. If there is a glut of available properties in an area, you might want to talk to your real estate agent about why so many other investors are selling at once, or why deals are taking so long to close. Absorption rates of 20% or more mean that homes are selling quickly.
31. Know Your Inherited Tenants
Ryan Coon, Founder & CEO, Avail
If the property is occupied when you purchase it, make sure there are trustworthy tenants living there. Ask the previous property owner for his or her background checks, credit checks, and rental applications as well as the tenant’s rental payment history.
Keep our 31 pro tips in mind when buying your first rental property. They may help you avoid costly mistakes. Remember to research the neighborhood you’re going to buy in and know what similar properties have sold for before making an offer.