As you probably know, real estate investors have the potential to become some of the wealthiest people in the world. That potential, along with the fact that nearly 40% of Americans are now choosing to rent, creates more than enough motive to think of investing in rental property.
However, investing in rental property is not only a large investment but also a large commitment. Before diving in, it is crucial to educate yourself on what it takes to successfully purchase and manage rental property. To get you started, check out these guidelines on what it takes to become a successful rental property owner.
Check Your Debt
Before you visit the bank or start your property search, it is important to first get your debt in order. Although seasoned investors may purposely carry debt as a strategy in their investment portfolio, first-time rental property owners should do all they can to pay down other debts before moving forward with purchasing rental property.
If you are currently working to pay medical bills, student loans, or credit card balances – focus there first. Rental property can provide a second income (after a few years of solid investment!), but the goal is to have the cashflow to make payments on your debt. Paying off other debts first ensures you have that margin of safety when adding a rental property to your investment portfolio.
Know Your Budget
Assuming you are in a good place with your debt-to-income ratio, you now need to consider your rental property budget and the amount a lender will be confident you can afford (and pay back!). What is your income? What are your debts? An increasingly popular question: What is your credit score?
A credit score of 620 is the minimum needed for most lenders to finance an investment property purchase. Even if your score is at or above 620, keep in mind that your score will determine your loan’s interest rate. Interest rates will increase if your score falls below 740, so consider going back to guideline #1 if you find your credit score will negatively impact the details of your rental property loan.
Get The Down Payment
Investment properties typically require a larger down payment than the properties you occupy. If your debt and credit score are in check, the next guideline to become a successful property owner is ensuring you have at least a 20% down payment for your rental purchase. Many lenders expect a minimum down payment of 20% because rental properties cannot carry mortgage insurance.
If the down payment or interest rate requirements seem harsh, there is the possibility of using leverage to make your rental property purchase. The idea of leverage is quite simple – leverage allows you to use other people’s money to increase your return on investment in the future. By using leverage as a strategy, you can use a separate loan (with a better interest rate and down payment) to kickstart your larger, rental property loan. Purchasing rental property is a long-term investment and using borrowed money to improve your rental loan details can be a smart way to start.
Have The Time and Expertise
Hopefully you now understand if (and when) you can purchase rental property. Now it is time to understand if you should purchase rental property. Making the purchase is only the beginning of becoming a successful property owner.
As any homeowner knows, maintaining a property can feel like a full-time job. You may feel like you are always fixing or renovating something in your home. A successful property owner must also make that commitment for their rental property.
Do you know how to fix a toilet? Who is going to paint or re-paint the walls? What about landscaping? Hiring the professionals makes sense but will also eat away at your profits. Doing it yourself will save your profits but eat away at your time. Unless you are handy around the house or have a surplus of cash to spare, becoming a property owner may prove to be more than you can handle.
Ask The Professionals
Hiring trade professionals to maintain your rental property can be helpful or harmful, but consulting the professionals is never a bad idea. Discuss your financial health and financial future with a trusted lender and ask for their advice on improving your investment portfolio. Set up time with a highly respected realtor in your area to create a better understanding of the market and properties that fit your abilities.
Take it one step further and consult a current rental property owner or landlord who oversees property similar to what you plan to invest in. They not only talk the talk but also walk the walk. They can provide advice on what to purchase, how to purchase, and what to expect on a daily basis. This person may even become a helpful mentor on your journey to real estate success.
Every financial decision in life includes weighing the benefits against the risks. Before jumping into the role of a new rental property owner, consider if it is the right fit for your lifestyle and abilities. It can take years before a rental property becomes profitable, so make sure you have what it takes to not only make the purchase but also maintain it.
From your debt to your credit score to your handyman abilities – owning rental property is hard work. Your finances and loan options are only one piece of becoming a successful landlord. If you are handy, make sure you have the time. If you are not handy, make sure you have the money. If you do not know where to start, consult experienced lenders, realtors, and landlords before making the big decision to purchase rental property. Finally, ask yourself the question: Do you have what it takes to own rental property?
Author:
Peter EveringUtopia Business Development
Managing your SFH, Multi and Commercial Property
www.UtopiaManagement.com