Buying your first rental/investment property can be an exciting yet nerve-wracking task. There are several important things to consider before investing your money. At Boeve Properties, we are here to help, but read on for a few questions to ask yourself first:
1. Do you have a complete understanding of the neighborhood the property is in? Location is key and there are several questions to ask yourself – all of which can attract or not attract quality renters.
- Is the rental property in a great school district? A strong school district (including academics, extracurriculars and athletics) will attract parents looking to give their kids more opportunity.
- Is there quick access to major freeways and interstates?
- Are there any attractions, restaurants, walking and hiking trails, or access to water (lakes, ocean, rivers, etc) and/or mountains nearby?
- What are the economic and social trends in the area? Is any new industry coming in? Is unemployment up or down? What does the crime rate look like?
2. Do you want to invest in one property or more? We recommend investing in a Single Family home first. Learn the ropes (as there will no doubt be lessons to learn along the way) and then consider other properties once you have the first established and thriving.
3. Do you have enough Cash Flow to not only buy the property but to cover costs for several years moving forward? You can estimate nominal maintenance costs at 1% of the property value annually… however it is a great idea to put together a spreadsheet of anticipated costs based on the condition of the house (how old is the AC unit, plumbing, etc). Standard annual costs include homeowners’ insurance, homeowners’ association fees, property taxes, pest control, landscaping, and repairs. Also take in account for unexpected emergencies including those due to natural disasters if the home is in an area prone to wildfires or hurricanes. We recommend setting aside 20-30% of the property value to account for unexpected emergencies and repairs. It is very important to take all of this into account when determining what you will charge for rent.
4. How much personal debt do you currently have? If you have student loans, unpaid medical bills, or children that will attend college soon, then purchasing a rental property may not be the best move right now. If you have found the perfect property and can’t walk away from the opportunity – be sure that you still have the cash cushion you need to pay for unexpected issues while still paying down your debt.
5. How much of a downpayment do you need? Investment properties generally require a larger downpayment and have more stringent approval requirements. In most cases, you will need a 20% downpayment – as mortgage insurance is not available on rental properties.
6. Who is going to manage the property…. aka are you ready to be a landlord? Are you handy enough to take care of repairs yourself or will you need to hire someone? Keep in mind, to keep renters happy you will potentially need to fix issues around the property quicker than you would in your own home. You may want to consider putting together a solid team of cleaners, handymen, plumbers, etc to have on call. Are you able to handle confrontation and stand your ground? When dealing with renters there may be a fine line between offering grace or being pushed around (especially when it comes to late payments, damage, etc).
7. Does this decision bring you one step closer to your goals? Have you thought about what you are hoping to accomplish with this property… aka… what is your “why”? Are you counting on this property to be a money maker? Are you excited about making renovations in a home that is not your own? Are you buying an investment property because all of your friends are? Make sure that this purchase is in line with your life goals and you are not just purchasing for the sake of purchasing.
8. Do you want long term or short term tenants? Do you want to operate this property as a vacation home, a year to year lease, or a long term contract? For each you will need an airtight rental contract with appropriate security deposits and terms.
9. Should you invest in landlord insurance? You should consider protecting your new investment with landlord insurance. This insurance generally covers property damage, lost rental income, and liability protection – in the event a tenant or visitor suffers injury as a result of property maintenance issues.
10. What are the tax implications? Some locations charge investors a higher rate on property taxes than owner-occupants. Be sure to call your local tax assessor to determine what the tax rules are in your area.
11. Should you buy or finance? It depends on what you are comfortable with. Paying cash can help generate positive monthly cash flow. On the flip side, financing can give you a greater return based on trends in the market and value of the property.
12. Should you buy a fixer-upper? For your first rental investment, we recommend avoiding a fixer-upper. We have seen all the TV shows as well… and it is very tempting, but unless you have a contractor who does quality work for cheap or you are skilled and have tons of time – you will likely pay way too much to renovate.
13. What will your return be? On average, you can expect a 6% return in your first year and it should grow over time.
14. What are your legal obligations? Look into landlord-tenant laws in your state and city. It’s very important for you to understand your rights and the tenants’ rights for issues including security deposits, lease requirements, eviction rules and more.
15. What is you exit strategy? Real estate has a tendency to throw investors many curveballs. Be sure to have a plan on when and if you want to eventually sell the property and back up plans on what you would do if your financial or personal situation changes.