How to Buy Rental Properties

Investing in a rental property is a great way to generate a steady source of extra income each month, and now is a great time to buy. The poor economy and falling house prices may not be good news for homeowners, but it offers a fantastic chance for those who have the means to buy a rental property. Buying a rental property takes a serious commitment of both time and money, however, so be prepared before you jump in. Make sure you do your research and know what you are getting yourself into so that your investment doesn’t end up being a huge mistake.

Research the real estate and landlord and tenant laws in your area and make sure you understand them completely. The more informed you are, the less chance you will have a problem once you buy a rental property and have tenants.

Decide Where to Buy a Rental Property

Look around your area to find the best place for a rental property and decide which type of people you want to rent to. Choose the location of your rental property carefully because this will determine the type of renters you are likely to get. For example, if you buy a rental property in a rough part of town, you are not likely to attract a middle-class family with children. Instead, you should look for a rental property in a more suburban area that is close to schools and parks. Likewise, if you want to rent to college students, you will want to buy a rental property near a college campus or bus line. Regardless of who you want to rent to, try not to stray too far from the city because this will make renters harder to find.

A good real estate agent who is knowledgeable about rental properties will be an invaluable asset to you. They can provide information about the local rental market, the properties available and help you narrow down the choices until you find a rental property that meets your needs.

Find a mortgage broker to the handle the financing of your rental property purchase. Work with them to find out how much you are qualified to borrow and how much you will need for a down payment. Generally, lenders will require you to be in better financial shape to buy a rental property than they would for a personal home. The reason being that you are less likely to walk away from your home than you would a rental property if things go bad. The lender may also require a larger down payment and charge you a higher interest rate.

Also, look at your finances and make sure you will have enough of a reserve after buying your rental property to cover unexpected repairs and vacancies. Remember that you will still have to pay the mortgage and maintain the rental property even if you don’t have a tenant.

Unlike your home, you don’t buy a rental property because you love the style or the view. Buying a rental property is strictly a business decision, so you want to make sure you have the right combination of value and income making potential. Before you buy, consider the location, condition and age of the property as well as how much maintenance it has had previously and still requires. Also, request the rental history to see how long previous residents have stayed and whether the current residents pay their rent on time.

You haven't made an offer yet, so figure out how much the mortgage will be each month at the current asking price, including the taxes and any additional expenses. Don’t forget to factor in regular maintenance costs and occasional vacancies. Next, figure out how much you can charge for rent by looking at other similar rental properties in the area to get an idea of the average rental rate. Multiply the rent you can charge per unit by the number of units and subtract your estimated costs to get your monthly income.

If the amount of potential income isn’t high enough, then figure out how low the purchase price would have to be to make it worth it. Keep this number in your mind when you make your offer because this is the maximum price you are willing to purchase the property for. Overpaying for your rental unit is a big mistake because you could end up with a bill you can’t pay and no way to sell it. Experienced real estate investors look at the numbers and won’t buy your property from you if it is not a good investment.

Once you have settled on a rental property that meets all of your criteria, it is now time to make an offer. Before you make an offer on the rental property, find out as much as you can about the current owner. Find out if the owner lives locally, how much they paid for the property, how long they have owned it, how many other rental properties they have, how long the property has been on the market and if it is under foreclosure. The more you know, the more prepared you will be to make an offer. Basically, you want to find out how motivated the seller is.

Work with your realtor to put together an appropriate offer including any needed repairs you want the seller to cover. Remember, the lower the sales price and the fewer repairs you have to pay for yourself, the more money you will have in your pocket. Make sure the offer is lower than the maximum amount you are willing to pay so that you have some negotiating room.

If you and the seller are not able to negotiate terms that are satisfactory to you, be ready to walk away. Don’t get so caught up in the excitement of buying the property that you forget about your financial goals. Keep a cool head and remember that there will always be another rental property for you to buy.