Many people buy a home with the plan to eventually (or immediately!) turn the property into a rental for another family. Knowing how to buy rental property proves immensely helpful for those looking to earn a passive income stream.
On paper, it sounds easy: buy a home, renovate where necessary, and after screening prospects, place a well-qualified tenant on the property. But the reality of buying a home to rent out is a bit more complex.
To help future landlords, we’ve included a handful of useful tips throughout this article.
First Steps of a Rental Property Investment
Many savvy investors participate in auctions and county tax sales to acquire low-cost properties. While feasible for some, buying a rental property this way is a bit of a gamble as most properties bought under such circumstances require extensive renovation.
Of course, there are other ways to approach a rental property investment, such as:
- Find a good realtor. Establishing a relationship with real estate agents is one way to stay ahead of the competition. By providing a set of criteria for the home and area you’re seeking, most realtors can quickly round up ideal candidates for a rental property investment to ensure that you’re as informed as possible. Some will even be privy to certain knowledge like homes nearing listing status thus allowing buyers to make offers before a home officially hits the market.
- Get the funds. If you’re paying cash, that’s great! But if not, you’ll need to obtain a mortgage to help cover the purchase costs. You can use our free mortgage calculator to help determine your budget. Once you’ve crunched the numbers, getting pre-approved will allow your agent to formally submit offers to sellers. For those who already own property, a home equity line of credit can be an ideal way to get started in buying a home to rent out.
- Collaborate with handy people. For those well-versed in home repair and maintenance, most projects will simply require extra hands. However, those still learning or want to avoid this part of buying a rental property should network with reliable contractors and businesses to complete various projects. Remember that things go wrong, so having people who can, for example, replace a window or install a new water heater with little notice will be invaluable to appropriately hosting tenants.
- Connect with a partner. Though not always necessary, having a partner to share expenses and split profits with can help offset some expenses in exchange for a share of the profits. Though a lawyer isn’t necessary when buying a home to rent out, you should have a legal professional look over any agreements you make with a business partner. Remember that revenue must always be applied to home expenses first (i.e., the mortgage, repairs, taxes, etc.) before designating any rent you collect as profit.
Tips for How to Buy a Rental Property
Once you have the preliminary steps figured out you can begin to dig into other aspects of buying a rental property.
Here, we have a few tips for review to know best how to buy rental property.
What is the 2% Rule for Investment Property?
Most rental property owners use some derivative of the 2% rule to help determine pricing and returns. This rule states that the monthly income you make from renting out the property should be equal to at least 2% of the purchase price. You can use this guideline when you’re buying a home to rent out, but it’s essential to factor in other expenses and circumstances when calculating returns.
This calculation works best when all systems in a home are in peak condition, meaning either new or well-maintained, as this maximizes net operating income (NOI). Understand that the failure of a major appliance like a furnace or a new roof will be pricey, so it’s best to set money aside or fund an escrow to prevent repairs from impacting a home’s livability and your revenue stream.
What are the Local Laws and Ordinances?
Every area has unique requirements for landlords and housing occupants that can cause problems for those in violation.
For example, code enforcement in certain areas can hound owners and occupants for poorly kept homes or yards and issue fines based on the nature of the infraction. Property owners who disregard severe problems in a home can be subject to penalties or may find that tenants aren’t legally required to pay rent in the event a major repair is neglected or a serious safety issue emerges.
In areas requiring landlords to register with local agencies, it’s vital to keep in good standing and review any material they might provide. As you explore how to buy a rental property, keep in mind that it’s ideal to go above and beyond what’s required. This can help provide the best possible living experience for your renters and avoid unnecessary fines from local authorities.
Be Involved
Investing in your property beyond its ability to produce income is an excellent way to stay ahead of the game.
Even the most easy-going tenants in homes with great bones can sometimes experience issues. Conducting routine maintenance on your rental property investment and proactively tackling minor problems can help prevent small problems from snowballing into much more expensive problems.
For example, providing furnace filters for your tenants is an inexpensive way to help prolong the life of heating and cooling systems. For properties with trees you’d like to preserve, helping with gutter cleaning ensures that rainwater and snowmelt are directed away from home, thus prolonging the life of the foundation.
Keeping a property in good shape, both mechanically and aesthetically, is contagious in the sense that it often inspires renters to go above and beyond in their care for a property.
Is Buying a House and Then Renting it Out a Good Idea?
It sure can be, if you know how to buy a rental property and then manage it appropriately. Being a great landlord mostly boils down to planning. Understanding your budget and being realistic about returns allows you to identify the best properties when buying a home to rent out and appropriately calculate your earnings and expenses.
Like all investments, there is always a risk, but having good intentions and demonstrating dedication to your rental property investment will enable you to turn over all the necessary stones, operate within viable margins, and sustain a great working relationship with your tenants.
