Tips for Purchasing a Profitable First Rental Property
Investing in a rental property can come with plenty of benefits including tax write-offs, value appreciation, creating passive income, returns that adjust automatically with inflation, and predictable long-term averages in cash flow.
It's also nice that investing in real estate is tangible and easier to understand as compared to other investments. But there can be many misunderstandings in rental property investment that can get first-time investors into sticky situations.
Many people who become landlords assume that owning a rental property is pretty black-and-white and that they understand all of the details of becoming a landlord. But there is more to it than just buying a house and finding someone to live in it.
Here are some good tips for purchasing your first rental property
Don't rely on appreciation
Don't expect to make up for lost revenue in rent through appreciation when rents increase and the value of the home does as well. You don't want to purchase a home that is losing revenue in hopes that the negative returns will someday turn around.
It is not the best choice to start your investment property on what might be it is best to purchase your first rental property with a positive income outlook right now. It's better to evaluate purchasing a property on today's cash flow.
Don't forget to account for business costs
Some landlords think that generating income is as simple as calculating the mortgage and what they are able to charge in rent and then attributing the difference between the two to pure profit.
There are more costs that goe into running the business of a rental property than just paying the mortgage every month. As a landlord, you are responsible to make sure that the property stays in top livable condition for your tenants. There will be extra costs of running your rental business including repair and upkeep of the property. It is best to put a portion of the rent money you receive aside after paying off the mortgage for these added costs.
Make sure to budget for a vacancy
Just because you have an available rental does not mean that you will always have someone interested in renting your property. There will be a time of vacancy and as such you will be the one responsible for paying the entire mortgage and utilities for the home during this time.
Of course, before purchasing a home you want to do your homework on the vacancy rate or potential vacancy rate for the area. It is a good idea to talk to local area landlords or discuss this with a real estate agent that has experience in helping real estate investors purchase rental properties in the area you are looking to purchase.
You want to make sure you always have some extra money set aside to be able to pay for the cost of the property during the time you do not have any rent coming in.
Consider property management
If you are hoping to become a landlord and have this property be an extra source of income on top of a day job you may want to hire a property manager to help you take care of all the small details required of a landlord. Unless you plan to be a full-time landlord it will be truly beneficial for you so that you do not hit burnout from all the demands of being a landlord.
When hiring a property manager you also want to budget for the cost of property management. You want to make sure that your rental can generate enough income to cover the cost of the mortgage payment, upkeep and repairs, and your property manager.
Have emergency cash available
It is very important for every landlord to keep a very deep cash cushion readily available for every property that they own. The expenses described above can be fairly predictable but in some cases can be unpredictable. There could also be an emergency that arises with any property that you always want to be able to cover. For example, you never know when a pipe might burst and flood the home.
You want to do your homework on the surrounding neighborhood of a rental property. Properties may cost less in questionable areas but it will also be harder to retain dependable and responsible renters. You want to make sure that you are doing everything possible to purchase properties with a lower chance of eviction as well. Having to evict a tenant can cost a significant sum of money. There can be some success in less desirable neighborhoods for rentals but it is not the best idea for purchasing your first rental.
Always screen a tenant
Don't take the first renter interested in your new rental just because they would like to live on your property. It is always best to have every potential renter fill out a rental application and screen them to ensure they will in fact be able to afford rent and be a responsible tenant on your property.
While there is no sure-fire way to know that a tenant will pay their rent on time and take care of your property responsibly there are some application questions you can ask to help lower your risk of taking someone in that will not pay rent or that will cause damage to your new investment.
Communicate rental expectations upfront
You do not want to be overly demanding of your tenants as this will cause reliable tenants to feel overwhelmed and look for another place to live. But you do want to communicate reasonable rental responsibility requests to your tenants before they sign a rental agreement to these terms.
Some of these requests could be what you expect the tenant to take part in as far as caring for the home. Maybe you will decide that there is a no pet policy for your rental and you should communicate this clearly when they sign the paperwork as well. You also want to make sure they are well aware of any utility costs that they are responsible for not included within their rent payment. You do not want the water shut off to your home and have someone living in there without you knowing about it.
Require renters to hold renters' insurance
This is a very good thing to include in your rental contract agreement. This helps in the event that an emergency repair is needed. You are not responsible for replacing any of the tenant's damaged belongings. They will be able to file a claim through their insurance instead of creating a messy ordeal with the landlord. Of course before creating any lease clauses you want to make sure that they are legal in the area you are renting.
Be knowledgeable of all your state and local requirements
Every location is going to require landlords to conduct business in a reasonable manner to provide a safe and livable environment for a renter. In each location these requirements are very different and it is the landlord's responsibility to know these rules and regulations before renting out their property to someone.
Many first-time landlords have faced trouble not knowing what is required of them in the area in which they owned a rental. In most cases, this comes back to bite a landlord as they are supposed to know what they are required to do.
For more information on purchasing your first rental income property in Boston and surrounding areas please contact us anytime.