What Do You Need To Know About Your First Rental Property?

Rental properties are great long-term investments that ensure passive income and wealth generation. You’ll have a solid retirement plan if you ever choose to buy one. No matter your goals, rental properties are great investment options if you do it right.

However, like any investment, rental properties require adequate knowledge for success. 

Do you have the best location, property type, and finances to maintain the rental property? We’ll answer these questions and more as we discuss everything you need to know before buying your first rental property.

You Need To Have Strong Finances

Buying your first rental property can put a strain on your finances. That’s why you need to ensure that you have sufficient resources to support your acquisition. After all, you’re not only paying for the property itself, but you’ll also pay for a host of other things, such as:

• Property maintenance
• Insurance
• Utilities

You’ll also have to cover miscellaneous costs that you didn't see coming. It’s critical to keep your finances strong and have some emergency cash stashed away to pay for both expected and unexpected costs when buying a rental property.

Your Personal Debt Will Be a Burden

A common mistake in investing in rental properties for beginners is that they don’t settle their liabilities first.

While it’s a wise decision to diversify your investment portfolio, a debt-driven investment will cost you in the long run. We recommend that you pay all of your debts first, including:

• Student loans
• Mortgage
• Unpaid medical bills

Pay your debts before you think about buying your first rental property. 

If you insist on doing it, you need to calculate your return on investment first. However, maintain a margin of safety so you can safely pay off your debts.

You Need To Save for a Downpayment

Rental properties are investment properties. Therefore, you’ll need to secure a significant downpayment to get approved. It isn’t just the usual 3% down payment that you paid for your residential property. Unlike your homes, rental properties require a 20% or larger down payment.

Don’t worry, though. You have different financing options for your first rental property. The most common financing option out there is bank loans which are not backed by the US Federal Government. You need to pass a rigorous process to qualify for this financing option. Your lenders will review your financial background, including:

• Credit score and history
• Income and assets

Usually, lenders will also require you to set aside six months’ worth of cash to settle your obligations.

Another financing option would be tapping your home equity. There are three options for this method.

1. First, you can apply for a home equity loan, which is a consumer debt with a fixed rate.
2. Second, you can apply for home equity lines of credit, allowing you to use your credit card to fund your purchase.
3. Lastly, you can use cash-out refinance to convert your home equity into cash.

Choosing which type of financing will depend on your needs and preferences. Be sure to conduct your research when deciding how to secure your rental property down payment.

There Are Different Property Types

Buying a rental property also entails which type of property you should invest in. It’s crucial to determine your goals, preferences, and capacity when investing in rental property as a beginner.

The question of which type is critical if you’re searching for how to buy rental property. All rental properties have pros and cons, and you may want to check them out before deciding.

Affordable Housing

You may think that the first option for real estate investing is luxury homes and condos. However, affordable housing is rising and could become a good investment for you.

There is less competition, it benefits communities, has a lower cost of maintenance, and can attract numerous tenants.

However, remember that you cannot raise rental fees with affordable housing. This may hurt you long-term, especially if you won’t empower your tenants to properly take care of their homes. Affordable housing requires you to communicate your expectations with your tenants to prevent damages to your property. Also, you’ll need to know how to deal with delinquent tenants who keep damaging your property, such as:

• Documenting all damages
• Estimating damage repair
• Leveraging your tenant’s security deposit to cover repair costs

Multifamily Properties

Another good beginner option when investing in property is multifamily units. This rental property allows you to have more than one housing unit. The most common types of multifamily properties are:

• Duplexes
• Apartment complexes
• Townhomes
• Condominiums

If you’re a beginner real estate investor, it is a good strategy to focus on three types of properties at first: duplexes, triplexes, and four-plexes. They’re generally more affordable than other types of multifamily properties.

Like most rental properties, location is critical for a multifamily unit. Look for properties with high yield rates situated in well-connected and well-maintained neighborhoods. Living in one unit of the property is also an option to qualify for owner-occupied financing. Some factors that lenders will look at are your debt-to-income ratio, credit score, and downpayment.

If you’re having difficulty marketing your multifamily housing, check out this blog to learn some marketing tips for investors with a small marketing budget.

Student Housing

Living near a university or college presents ample opportunity to buy a rental property.

A key consideration for student housing is the academic cycle of nearby schools. This will determine your renting process and allow you to have year-round leases. Make sure your rental property is within walking distance to schools to appeal to most students.

Student housing properties are typically shared units between students, so it’s best to have them sign a joint and several liability contracts to ensure that everyone takes proper care of your rental property.

You can also hire a property manager with expert student marketing knowledge. They’ll advise you to advertise your rental property as “convenient to campus” instead of “student housing” for regulatory purposes. 

You may want to check out our blog on student housing trends to get the most out of your student housing rental property.

Military Housing

Military housing is perfect for investors near military installations. Military personnel will find your homes in demand and have the income from their housing stipend to afford your home.

You need to consider a few things, such as the Servicemembers Civil Relief Act (SCRA). This act:

• Prohibits eviction unless rent is over $3,851.30 a month
• Does not allow foreclosures and delaying of civil proceeding trials

While military members are reliable tenants, you still must prepare for frequent relocations if they’re on active duty.

Senior Homes

Senior homes are another option when investing in a rental property for beginners.

Senior housing can have complex requirements that you need to prepare for. For example, you must ensure that your rental property is pet-friendly and has safety measures like accessibility ramps and security cameras.

Check out our post on the latest senior living trends to know what you should be doing when investing in senior homes.

Develop a Property Management System

Buying rental property can become complicated quickly. You’ll have to manage tenants and properties and keep track of payments, costs, and revenues. Developing a property management system and hiring a team will help you avoid headaches and stress from managing your rental property.

Manage Your Rental Properties With ExactEstate

ExactEstate’s property management solution can help your business grow and enhance your team’s efficiency after buying a rental property. See our property management system in action by scheduling a free demo with us.