Buying an Investment Property? Six Ways to Do it Right
Buying real estate has become part of pop culture, with national television shows ranging from following painstaking vacation home shopping experiences to watching investors fixing up distressed properties to “flip.” This, along with a relatively strong market nationwide, is causing more and more people to look at making the move to investing in real estate and even in rental properties.
My friend who is a landlord likes the tangibility of the real estate investment. As someone who is a self-described “old school” guy, he feels more secure when he can touch and see the place where his money is, rather than in the intangible stock market. In fact, after he bought his first rental property, he quickly found that the steady income appealed to him and his financial security needs. He wanted more.
This is a fairly common story. Real estate investing can be addictive — always looking for the next deal that pencils out. For some investors, acquiring a second or third rental property is a great idea. For my friend, who is contractor by trade and has a lot of experience in his local market, this business makes good sense. For others, it does not.
It’s a good idea to do a thorough analysis before you take the plunge and buy more properties, even if you’re making money with your first and only rental property. If you’re considering a new investment but don’t want to end up in hot water, take the time to review these six tips.
1. Do the Math
Before you buy any property, do the math to make sure it’s something you can afford and the numbers work for your specific financial situation. Since this is an investment property, make sure your profits are worth the amount of work (and money) it will take once you acquire the property.
You should treat every new property as if it’s your only source of revenue. Crunch the numbers to make sure it is a worthwhile investment without weighing in other properties you may have in your portfolio. Look at your potential profit margins. Know your mortgage rates. Research rent rates and management costs. And make sure you can afford the closing fees, landlord insurance, and maintenance required.
If you come across a property that seems too good to be true, it probably is. Know when to walk away. It’s always best to leave those risky properties for the inexperienced suckers.
2. Know Your Inherited Tenants
Are you looking to purchase a property that already has tenants? Don’t assume that they are good tenants who will take care of the property and pay rent on time.
Ask the current property owner for as much documentation as possible on the existing tenants to make sure that they were properly vetted. The property manager or landlord will be able to share with you what criteria they used to qualify the current renters, like credit score, credit history, and criminal background. The property owner should also give you details on rent payment history. You’ll need this info to understand the existing agreements and know what kind of tenants you’ll be dealing with.
In addition, make sure the current tenants have a written lease in place. You can even go a step further and ask nearby neighbors if they know of any trouble caused by the existing renters.
3. Familiarize Yourself with Rent Regulations
Familiarize yourself with the city or municipality and make sure you are aware of the rental regulations.
Different states and cities have different rental laws. Some properties are not allowed to charge over a certain amount for rent. This is something you should check out for your first property and every property you buy thereafter.
If your new property is part of a homeowners association, take the time to read through the bylaws and regulations. Some HOAs put short-term rental restrictions in place, meaning that you can’t rent your property out on AirBnB or VRBO.
4. Pay Down Debt First
It’s easy to get excited when you see money rolling in from your first rental. You may consider resisting the temptation to buy more investment properties and instead work on paying down debt on your first property.
If you’ve followed the advice from step one and done the math, you may be confident that your investment will be profitable. If you are certain that you’ll bring in more profits than the interest on your current loans, you might be able to skip this step.
For those who are unsure or uncertain, the best decision may be to pay down debts owed on your first property before taking out another loan. This safe approach will protect you if the market takes a downward turn. The last thing you want to be is underwater on your loans.
5. Buy Something Rent-Ready
Some investors love the idea of a fixer-upper. Certainly, Hollywood has glamorized the lifestyle and results of the “flipper” with shows like Fixer Upper. As much as you might like to channel your interior Chip and Joanna Gaines, remember the work it will take to fix the place and get it rent-ready. Sure, you can save money on the purchase price, and if you can do some of the work yourself, it often sounds like a great idea. But as someone who already owns a rental property, you should know that the only way to be profitable is to have tenants.
Vacancies can destroy your profit margins. Every day your property goes without a tenant is a day that you’re losing money. It’s always best to look for something that you can rent out quickly, rather than experiencing a lot of downtime during the renovation process.
Anyone who has renovated a property before knows two things — repairs always take longer and cost more money than expected. The more construction you need to do, the more money you’ll lose in tenant vacancies.
6. Look Near Your Current Properties
Experts often say that you should invest in what you know. If you’re already having success with one property, consider buying your second property in the same area.
Knowing the neighborhood and understanding the local clientele may make it easier to find tenants. It can also make property management much easier if your various properties are within close proximity of one another.
Follow these tips and you just might decide that one successful rental property is all you need. On the other hand, if the numbers work and you’re confident it’s a good idea, you might want to take the risk and acquire that second or third property. And with a little luck, in a few years, you could be well on your way to being a real estate tycoon.
