Whether you are looking to buy a rental property to hold long term and increase your monthly income, or to hold short term and make a profit by selling the property, it’s important to follow a few key rules. Here are 10 tips for any investor seeking to maximize earnings and minimize expenditures when purchasing your first rental property.
1. Buy properties that are cash flow positive
What does “cash flow positive” mean? Cash flow is the amount of money left over after collecting rent and subtracting all expenses. For example, if the amount you collect for monthly rent is $1,500, and you pay $700 for the mortgage, $50 for utilities, $75 for insurance, $125 for property taxes, and $45 for repairs, your cash flow for that month is $505. The higher this number, the more money you will make. If a property costs more each month than the rent you are receiving, it is not cash flow positive, and you will have to spend your own personal money each month just to hold this property.
2. Buy properties in desirable locations
Location matters. It is arguably the most important thing to consider when buying a rental property, only second to buying cash flow positive properties. Would you live here? Is the property close to parks, restaurants and shopping malls? Does the area have a high walkability score? These are all important things to think about when searching for properties.
3. Hire a real estate agent
Use a realtor to help you find potential rental properties. A realtor will create a customized search for you in the areas you are searching in. The search can contain parameters such as location, home size, bedroom and bathroom size, and type of home (single family, duplex, etc). A realtor will also help navigate the intricacies of negotiation when you decide to place an offer to purchase a property.
4. Don’t overpay for the property
The average investor places an offer on at least 10 properties before buying a property. Don’t overpay for a property just to buy it. Whether you are planning on keeping the property long term or only keeping the property for a short time, overpaying for the property will lower your cash flow and decrease your realized earnings when you sell the property.
5. Work with a mortgage banker
It’s important to work with a mortgage banker that you trust. Getting pre-qualified early on will let you know how much you can afford and what your monthly payments will be. In addition, a mortgage banker can help you evaluate whether a property will be cash flow positive.
6. Make repairs yourself if possible
The less you spend each month on repairs to your property, the more money you will keep as profit. If a repair is simple, try fixing it yourself. If you do need to hire a professional, shop around and get several quotes before selecting a contractor. For example, if you need to hire a plumber, ask two or three plumbers to visit the home and give you a quote to repair the broken item before you select the plumber you like best.
7. Consult a tax professional
Income from rental properties will be reflected on your yearly tax return. There are several ways to list the property on your tax return depending on how you choose to title the property. Some investors prefer to own rental properties in their own name, whereas others prefer to own the properties in a business name. By speaking with a tax professional, you can learn the benefits and drawbacks of owning a rental property, and they can advise you on the best decision for your specific scenario.
8. Find a mentor
Where is the best place to go for advice on owning a rental property? Someone who already owns rental properties! Attending conferences, joining associations or going to networking events are all good ways to find a mentor. Finding a mentor who can support you and your ideas when it comes to your property is imperative. While you need to make decisions that best suit your needs, it’s always great to have someone who has been in your shoes to turn to for insights.
9. Always create written leases with tenants
Lease requirements vary from state to state. Some states allow verbal leases, whereas some states require written leases. A written lease is important to have your tenants sign so that you have enforceable rules and protection for both yourself and your tenant. Both you and your tenant will be bound by the written lease and it makes everything easier for both parties in the event of a disagreement.
10. Screen prospective tenants
Whether you utilize a property management company to find your tenants or find tenants yourself, it’s important to properly screen prospective tenants. Each adult tenant should complete a rental application and list their income, rental history and criminal history. Call the tenants’ prior landlords for references and ask the prior landlords if they would rent to the tenant again.
Buying your first rental property can be a daunting task, but with the right resources, support, perseverance and drive, you could be a successful landlord in no time!