Buying your 1st rental property

By Michele Karl

Working with HUD homes and foreclosures, I see many people buying rental properties. There are typically three main groups that come wanting to invest in a home.

One group has years of experience and does this for a living. A second group is knowledgeable first or second-time buyers who have taken the time to understand the ins-and-outs of this business before jumping in.

The third group might be you if you aren’t careful. They heard from their friend that buying a house to rent out is a smart move, but didn’t do much research on their own. They have some money in savings and decide to dive head-first into unknown territory.

Chances are, if you’re reading this, you’re already taken steps ahead of group three. While there is more research that has to be done on your own, such as exactly what loans you qualify for and housing trends in your specific area, read on for tips that will help every first-time rental property buyer.

Where’s the money coming from?

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When you look at buying an investment property, you’ll realize that you’re presented with very different options when it comes to loans. While there might be better offers to those buyers who are planning on living in their home, don’t get too discouraged.

There are many types of loans you can get for investment properties as well, conventional or FHA loans to name a couple. But when buying for investment, generally you are required to put down a higher down payment and the interest rates can be higher. There are several great lenders who can give you the specifics on the types of loans available.

If you have enough money set aside and are looking for a great investment to put that money into, great. Go ahead and skip the rest of this section. Otherwise, keep on reading.

If you don’t have enough money for a large down payment, it’s time to consider an investor. The details of the investments they make greatly vary and depend both on the person and your relationship with them.

Typically, though, they will pay for the house themselves and take a percentage of the profits each month. You, then, work as a type of property manager in this case. You’ll find the renters, take care of any problems that arise, and rake in your percentage of the monthly payment.

Clearly, you will get more of a profit if you invest your own money. Then, you also don’t have to work out any questions of ownership. It’s also important to consider, though, that this poses more of a risk. Later, we’ll discuss if the risk is worth it for you.

Calculate all of your expenses

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Of course, you’ll figure out your loan payment before you buy a home. But what else do you need to know?

First, if this is your first rental property, it’s probably best to stick to a home that doesn’t have much to fix. If you happen to be a contractor, feel free to take on what you feel comfortable with. Otherwise, wait until you find a home at a great deal that doesn’t take much work.

If you’re unsure where the best locations are or how much you should be paying when you buy an investment property, Priority Real Estate can help all those in East Tennessee. Otherwise, ask a real estate professional that you trust.

So, once you’ve finally found a home you’re interested in, the real work begins.

First, determine the total price you will be paying to purchase this home. Then, you’ll likely need to work on small things, like repainting the walls or fixing the stove. Add all these renovation costs in.

After this, understand how much you expect to get from a monthly rent. You can do this by looking at other rentals in the area with similar square footage. The next amount you need to add is the monthly taxes you’re going to pay on this property.

Don’t forget to add the cost of insurance if you’re planning on buying it. Then, estimate annual maintenance and add in a few months of not having renters, as it might not be swept off the market immediately.

After you’ve figured out how much money you’re really going to need for this home, go to a lender to determine the type of loan you can get. From here, put pen to paper to see if you can pay your loan, or even more than what is due each month, and still make a profit.

Make sure all of this, such as how quickly you could get a renter or the money set aside for maintenance, isn’t too much guess work. If you’re unsure about the rental market in your area, ask a real estate professional.

If all the numbers work out, though, you might just be on your way to your first rental property!

Can you handle renters?

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There’s just one more fact to consider. Unless you have enough money to spare on a property manager, you’re probably going to have to interact directly with your renters.

Many of the people who are going to be living in your rental property are wonderful families who you’ll be happy to host for many years until they decide, for whatever reason, to move. The reality of the situation, unfortunately, is that this isn’t always the case.

Maybe after months of not paying their rent, you’re forced to evict someone. You go to the house one day after giving them the notice to see it deserted, left in complete disarray. The refrigerator is missing, the walls are yellow from smoke stains even though the contract specifically said “no smoking,” and the carpets are covered in cat urine.

If you talk to people who rent out homes for a living, you know that this has happened to almost all of them at least once.

Another scenario is when renters try to take advantage of you. You’re a kind and understanding person, so when your renter is late on their rent, you tell them to just pay when they can. This drags on for months and months because you’re too afraid of being mean to your renter, but you’re worried about making your own payments because of it.

While the majority of people in the world are good, your renters might not always be. It’s important to realize before you buy your first rental property that you will have to be ‘the bad guy’ occasionally. Are you ready for that?

If you are and all of the numbers from the previous section add up well for you to buy a rental property, go for it! It’s truly a great investment opportunity that could bring you relatively stable monthly income for the rest of your life.

If you need help finding a home in East Tennessee, please feel free to contact Michele Karl at Priority Real Estate. Email me at Michele@allwedo.com or call my office number at 865-577-6600.

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