Purchasing your first rental property can be a daunting prospect. Fortunately, it doesn’t have to be. In this post, I will discuss the ins and outs of how to buy your first rental property, so that you don’t accidentally end up spending a small fortune on something you won’t be able to resell anytime soon. Let’s get right into it…
What to Know when Buying your first Rental Property
When you decide to buy your first rental property, there are a few things you should know. The first of these is that you need to define what you want and then conduct the necessary research to find the best property.
Here are some questions that you need to ask yourself:
- Do you want a multifamily property or a single-family property?
- What is your price range for the property?
- What area do you want the property to be in?
- Will you outsource the management of the property or manage it yourself?
I recommend that you create a goal for your first rental property and then a plan for achieving your goal. Trust me, this is a worthwhile exercise. Without a plan, you can end up with the wrong property and even lose on your investment.
When you purchase your first rental property you will become a landlord. Your responsibilities here will vary depending on whether you are going to manage the property yourself or outsource this to a property manager. Deciding that you will manage the property yourself means that you will have several responsibilities.
How are you going to finance the purchase of your first rental property? Do you have the cash saved to purchase the property outright? Or do you have money for a down payment and require a mortgage to fund the rest? Perhaps you are thinking of using other people’s money to purchase the property?
You need to research the area where you want to purchase your first rental property. This is essential for success. If you purchase a rental property in the wrong location then your project is unlikely to be successful. Check to see if the property is close to desirable amenities such as transport links, schools, stores and so on.
The fastest way to find your first rental property is to use a real estate agent that you can trust. Arrange a meeting with them and explain what you want to achieve. Realtor’s have access to properties that are not on the market yet and they offer the best chance of finding a property at the lowest price.
Do you intend to renovate the property or are you looking for a property that is ready to market as it is? It is not easy to find properties that are just right for the market and do not require any renovation. If you are going to renovate, estimate the cost accurately and add this to your plan. You need to know if your project is going to meet your profit goals.
Along with a good real estate agent, you need to build a team of professionals that you can rely on. This can include:
- Lawyers
- Mortgage brokers
- Property managers
- Contractors for the renovation work
By surrounding yourself with the right team you can move forward with confidence to purchase more rental properties that will meet your profitability goals. If a member of your team lets you down then find another to replace them. This is your time and money – you need to take it seriously and treat it as a business.
When should you buy your First Rental Property?
A question that I am often asked is “when should you buy your first rental property?” My answer to this question is always the same – when you find the right deal. Novice investors in rental property often jump in to the first reasonable deal that they come across. They don’t realize their profit goals by doing this.
Here are some questions to ask yourself to determine when to buy your first rental property:
- Is the price of the property right for my goals?
- Is the property in the right location where there is demand?
- What rents can I charge for the property (research the rental prices of similar properties)?
- Does the property require renovation and can I do this within my budget?
- How quickly are similar properties rented out?
When you can answer of these questions positively then it is time for you to purchase your first rental property. You need to be patient and believe that the right deal is out there for you.
How much Money do you need to buy your First Rental Property?
The amount of money that you require to purchase your first rental property depends on your chosen strategy. If you have the cash to buy the property outright then you will need the final purchase price and enough to cover other expenses.
If you are going to finance your first rental property then you will need a down payment of around 25% of the purchase price. In addition to this you will need enough to cover other costs such as renovation, legal fees, and so on.
How to get Money for your First Rental Property
There are several ways to get the money that you need to purchase your first rental property. Here are some ideas for you:
- Use your savings to purchase the property outright or for a down payment
- Borrow money from family and friends
- Get a loan from a financial institution
- Get a group of investors together and use their money for the purchase while you manage the project – agree on a profit split at the end of the project
I like using other people’s money for my real estate investments. Rather than purchase a property for cash I will often look to finance it using other people’s money. When you are experienced in successful rental property purchasing you may be approached by investors to manage projects for them for a share of the spoils.
How to get started with a Rental Property
Here are my steps for getting started with a rental property:
- Create your goals which includes the level of profitability that you require
- Treat the purchase of your first rental property (and subsequent purchases) as a business
- Find a real estate investment club in your area or online for networking opportunities
- Determine how you will finance your first rental project (you must know your numbers)
- Decide on which area you want your rental property to be in and fully research the area
- Start building your virtual team by finding good realtors in the area
- Assess all possible deals to see if they meet your requirements e.g. profitability, budget for renovation, rental prices, and so on
- Close the right deal and hire a property manager for finding tenants and managing the property
- Move on to your next rental project
You must follow a plan like this to maximize your chances of success with your first rental property. This series of steps works for me every time. Do not be impatient and wait for the right deal to emerge.
Where to buy your First Rental Property
The simple answer to this question is to buy your first rental property in a location where you can get the rental prices that you require to meet your profitability goals. It doesn’t matter if the location is “up market” or not. There needs to be the opportunity for you to meet your profitability targets with the properties that are available in the area.
Location really is everything with a rental property. You must identify an area where there is demand for renting and you can charge the right amount of rent to make your numbers work. I never attach myself to any particular location. The acid test for me is that the numbers work.
How to find a Rental Property to buy
When you’re looking for a rental property to buy, you have a number of options. I usually connect with local realtors and enlist their help to find the right deal. Local realtors usually have good knowledge of the area and know where the best rental properties are. They know where rental properties are in demand and the rents that are charged.
Often, a realtor will have a few rental properties available for investors. If they know that you are serious about purchasing your first rental property then they should be willing to share this information with you. I have found many good deals for rental properties through my close relationship with realtors.
You can also look online for potential rental property projects. Here are some of the websites that my team uses to find potential deals:
- Realtor.com
- LoopNet.com
- Trulia.com
- Craigslist.org (yes, we use Craigslist!)
- Auction.com
- RealtyTrac.com
My team has found all of these websites helpful in the past. Try them all to see which of them meet your needs. They are all a little different. For example, RealtyTrac.com specializes in foreclosures and Realtor.com is a combination of more than 800 MLS databases in the United States.
How to buy your First Rental Property with no Money
What property do you live in right now? Is it a multi-family unit? Could you live in one unit and rent out the rest to get you started with your first rental property business? I have done this before and it has always worked out well. Rent out my existing home to more than cover the mortgage and find somewhere else to live while still making a profit.
Using other people’s money to purchase a rental property is always something that I look to do. You need to be confident in your abilities to pull this off. Basically, your part of the deal is that you will find the right property, manage the renovations, find tenants and take care of everything else for a share of the profits.
My Final Thoughts on How to Buy your First Rental Property
If you can find the right deal then buying your first rental property is a smart thing to do. Not only can you earn passive income from your rental property but it is also likely to appreciate in value over time.
You must do your homework and be patient when you are purchasing your first rental property. It is easy to end up with a bad deal if you rush things. I understand that you are excited and keen to get started, but you need to keep your emotions out of any rental property deals that you are looking at.
Please leave your comments below and thank you for reading this post.
