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28 Tips For Buying Your First Investment Property

Blog by | February 20th, 2018

1. Use Leverage to Buy the Property
David Reiss, Professor of Law, Brooklyn Law School

Potential real estate investors should make sure to understand the mortgage market. If you get the right mortgage, it could help keep your costs low and reduce uncertainty about the property’s cash flow. Using the leverage of a mortgage will free up some of your cash so you can save it for repairs or a future investment. However, a mortgage can be a double edged sword since there will be financing costs associated with it, so it’s always best to consult with a professional.

Roh Habibi The Habibi Group buying rental property tips from the pros

2. Be Aware of Short Term Rental Restrictions

Roh Habibi, Founder & Principal, The Habibi Group

With the increase in short term rental companies such as Airbnb and VRBO, many cities have put into place short term rental restrictions. Your condo association or HOA may have their own restrictions too, and may not allow short term rentals under 30 days. Be aware of any laws and read your HOA agreement before you buy a property to ensure it can be used as a short term rental.

Larry Friedman SDF Capital buying rental property tips from the pros

3.Screen Your Tenants

Larry Friedman, Co-Founder & Principal, SDF Capital

Make sure to screen your tenant(s) with a background check, credit score check, and landlord tenant records. If they have poor credit or have been in landlord tenant court, rethink the person as a qualified tenant. This can save you time and stress later on down the road.

For more information, you can read our Fit Small Business article on how to screen tenants.

Ryan Coon Rentalutions buying rental property tips from the pros

4. Know Your Inherited Tenants

Ryan Coon, Founder & CEO, Rentalutions

If the property is occupied when you purchase it, make sure there are trustworthy tenants living there. Ask the previous property owner for their background checks, credit checks and rental applications as well as their rental payment history.

Kathy Fettke Real Wealth Network buying rental property tips from the pros

5. Invest in Single-Family Homes First

Kathy Fettke, CEO, Real Wealth Network

Invest in single-family homes first since it’s the simplest way to get started as a new real estate investor. The upkeep is easier than multi-family or commercial properties. With only a single tenant, there doesn’t tend to be as much wear and tear on the property, and when something breaks, you’ll only need to fix one thing.

Jesse Harrison Employee Justice Legal Team buying rental property tips from the pros

6. Always Do the Math

Jesse Harrison, CEO & Investor, Employee Justice Legal Team

Let the numbers speak for themselves. Inexperienced home buyers often start overanalyzing and overcomplicating the situation. It is unnecessary to do that. Just do the math. If you rent the property out for “X” per month, will you at least break even? If yes, then the home is a good deal. If not, move on. If you find yourself stuck because you’re scared of losing money, just do the math.

Iris Felder Berkshire Hathaway Home Services buying rental property tips from the pros

7. Focus on Your Return on Investment

Iris Felder, Luxury Sales & Rental Expert, The Capone For Your Home Team

Invest in an area that will get a high return on investment. A cap rate of 7% or greater is ideal. You can find some amazing deals in locations that are transitioning or in gentrified areas. In order to obtain the highest ROI, you will need to know the area and what houses are selling for in the neighborhood.

Freddy Baez Hamilton Group Funding buying rental property tips from the pros

8. Work with a Finance Professional

Freddy Baez, Producing Sales Manager, Hamilton Group Funding

Always align yourself with professionals that understand leverage and opportunity cost in the financing world. True professionals will be able to assist you in understanding the financing side; what the cost benefits are and what the opportunity cost may be by using all cash. They will also be able to provide you with clarity on what the actual revolving cost for the asset would be and what your true margins are.

Jessica Dolan Room to Breathe buying rental property tips from the pros

9. Have a Written Lease in Place

Jessica Dolan, Home Organizer/Stager, Room to Breathe

Definitely have a very clear lease in place with all details written out so there’s no confusion about the tenant’s expectations. The lease should include when the payments are due, what the lease termination fees are, and if pets are allowed. The lease should also include what cleaning the tenant is required to do and if the heat should be left at a certain temperature during the winter.

For more information, you can read our article on residential lease templates, including 3 free downloadable templates.

Don Tepper Solutions 3D buying rental property tips from the pros

10. Talk to the Neighbors

Don Tepper, Investor & Realtor, Solutions 3D

Knock on the neighbors’ doors and talk to them. Explain that you’re considering buying the property, and would like to know if they’ve had any difficulties with the tenants or the owner. While you’re there drive around the neighborhood and check out the property during the day, the weekend and in the evening to see what the neighborhood is like.

Katie Messenger Keller Williams buying rental property tips from the pros

11. Work with a Property Management Company

Katie Messenger, Realtor, Keller Williams

Think realistically about your time. Do you have the time or desire to answer calls at 2:00 a.m. for a furnace that stopped working? If the answer is no, then consider hiring a property manager. Like a Realtor, you’ll want to interview different companies to determine if their services and fees are worth the investment of not having to do background checks, take maintenance calls, and interview tenants yourself.

Tom Davies Accelerate Homes buying rental property tips from the pros

12. Purchase a Property with Outdoor Space

Tom Davies, Co-Founder, Accelerate Homes

A huge percentage of prospective renters want to enjoy a cozy area where they can invite friends over or spend time on their own relaxing. Generally, most tenants aren’t picky about the type of outdoor area, but want it to be private, usable and an area where they can put their personal touches on it with plants, furniture and decorative lighting.

Shane Lee Realty Hop buying rental property tips from the pros

13. Do a Pro Forma Analysis

Shane Lee, Leasing Agent, Realty Hop

Do a “pro forma” analysis on the property you’re looking to buy. Look at similar properties in the same area, how the rents have changed in the past 10 years, and how they are projected to change in the next 10 years. Once you have the projected rent growth and estimated cost on operations and maintenance, you will have a better understanding of how much net income the property would generate, and how much you can make if you were to sell it.

Rob Stephens Avalara MyLodgeTax buying rental property tips from the pros

14. Invest in a Vacation Rental Property

Rob Stephens, General Manager, Avalara MyLodgeTax

Evaluate a potential vacation rental property and look at comparable rental rates on sites like HomeAway and VRBO. In general, real estate will increase in value over time, but certain markets will experience greater appreciation. Evaluate how the market has performed historically and identify areas of growth that can lead to greater returns. Additionally, ensure that the zoning laws and boundaries in the area allow you to rent out your home to guests.

For more information, you can read our ultimate guide on buying a vacation rental property.

Jeff Rohde J Scott Digital buying rental property tips from the pros

15. Buy a Property Near Apartment Buildings

Jeff Rohde, Founder, J Scott Digital

Buy in an area where there are a lot of apartment buildings. There’s a proven demand for rental properties in areas with apartment buildings since renters are always looking for a place to rent that is a move-up from a typical apartment. You will be able to meet that demand and rent out your property without spending as much in advertising costs.

Stacey Corso Home Union buying rental property tips from the pros

16. Balance Your Risk

Stacey Corso, Senior Communications Manager, Home Union

While real estate values can fluctuate, people still need a place to live when the economy experiences a downturn, which provides investors with a steady income from rental properties. This is why savvy investors understand the unique value of choosing the right passive rental property to balance out your risk. Always look for areas that will have high rental demand, even during downturns.

Nancy Brook Billings Best Real Estate buying rental property tips from the pros

17. Look for Properties Nationwide

Nancy Brook, Broker & Investor, Billings Best Real Estate

Consider buying properties in other parts of the country. You may be able to find a property that is much more affordable and provides a much better return on investment. If you go this route, you will want to find a great Realtor and property manager in that market.

Lisa Krause Keller Williams buying rental property tips from the pros

18. Know the Rent Control Regulations

Lisa Krause, Real Estate Agent, Keller Williams

Be familiar with the specific rent guidelines in the municipality where you are purchasing. The guidelines explain the process for registering the amount of legal rent and how to determine the annual rent increase you can pass on to the tenant. In certain situations, you can apply for additional rental increases such as vacancy decontrol or a one time capital improvement allowance. Knowing up front how much you can charge for rent helps you determine your investment.

Corey Vandenberg Platinum Home Mortgage buying rental property tips from the pros

19. Get Advice From Other Landlords

Corey Vandenberg, Mortgage Broker, Platinum Home Mortgage

Finding and keeping good tenants is an art all its own. Join a local landlord association or ask someone who has been a landlord for a while and get advice on what to do and what to avoid. This type of information will help you avoid pitfalls that could ruin your first time. Happy renting starts with being well informed.

Jeff Miller AE Home Group buying rental property tips from the pros

20. Buy What You Know

Jeff Miller, Co-founder, AE Home Group

Invest in a rental property in an area and niche in which you are familiar. Draw from your previous life experiences to gain a competitive advantage. For example, if you’re retired military, then buy a rental property near a local military base for military transfers. If you’re a college alumnus, then buy a student rental near your university’s campus. If you’re a nurse, then buy a rental property for short-term nurses near your hospital.

Richard Haynes Manhattan Pacific Realty, Inc. buying rental property tips from the pros

21. Invest Enough to be Cash Flow Positive

Richard Haynes, Broker/Owner, Manhattan Pacific Realty, Inc.

First time rental property buyers should only buy a property that cash flows. The best way to limit your risk and increase your odds of success is to make sure you are putting enough money down to be cash flow positive. There will be unexpected expenses so leave a margin for error. It also enables you to weather tough economic times. If the property cash flows, the fluctuations of the market are less relevant, and you can hold it for the long term.

Dean Myerow Las Olas Wealth Management buying rental property tips from the pros

22. Have Property Inspections Performed

Dean Myerow, Bond Professional, Las Olas Wealth Management

Have a professional perform a radon gas check if you are buying in a part of the country that traditionally might have radon coming up from the foundation. You should also have a sonar scan of the ground outside done if it is an old house and might have an unknown oil tank buried. You don’t want to buy an instant liability if one exists and it is leaking.

Seth Lejeune Berkshire Hathaway Home Services buying rental property tips from the pros

23. Buy a Rent Ready Property

Seth Lejeune, Realtor, Ask Seth Anything

Try to find something that is more or less rent ready. Getting into the investing business doesn’t have to be complicated, but it can be if you buy something that is a total rehab. Unless you have experience renovating houses, find something that is turnkey and can cash flow out the gate. Otherwise, you could get way behind the 8-ball when it comes to renting the property. Never forget the purpose here is to get the thing to produce income.

Alexandra Axsen Lake Okanagan Realty Ltd. buying rental property tips from the pros

24. Choose a Location Near Amenities

Alexandra Axsen, Owner/Managing Broker, Lake Okanagan Realty Ltd.

Pick a location close to public transit and amenities. Rental properties near Universities are ideal locations as most students will rent for the 4 years they are in University, and their parents will usually provide personal guarantees on the rent.

Mark Painter EverGuide Financial Group buying rental property tips from the pros

25. Choose a Property that is Ideal for your Target Renter

Mark Painter, Founder & President, EverGuide Financial Group

Buy a place and make improvements that cater to the typical renter in that area. You can get the most value by targeting the correct renter in your area such as students, young professionals, families, retirees, or vacationers. If you buy a house that would be ideal for families in an area that is predominantly rented by students or young professionals, there is a good chance you are not maximizing value.

Dan Green Growella buying rental property tips from the pros

26. Buy a Multifamily Property You Can Live in

Dan Green, Founder, Growella

For investors willing to live in their multifamily investment property, an FHA mortgage provides the best combination of interest rate and down payment size. For 2-4 unit properties, FHA mortgage rates are roughly one percentage point lower than a comparable conventional rate, and the required down payment for FHA is just 3.5 percent as compared to twenty-five percent or more.

Evan Tarver Fit Small Business buying rental property tips from the pros

27. Factor Cost Increases into Your Budget

Evan Tarver, Finance Editor, Fit Small Business

When you set a budget for your first rental property, remember to factor in cost increases and create a contingency budget reserve. Your HOA fees could increase and so could your property taxes and insurance. When you do a 5-10 year cost projection, use a 2-3% annual increase for your recurring costs.

Emile L'Eplattenier Fit Small Business buying rental property tips from the pros

28. Factor in Absorption Rate 

Emile L’Eplattenier, Real Estate Sales Analyst/Editor, Fit Small Business

Absorption rate, a measure of how long it will take for all the available homes or rentals in a given area to sell or rent, is an important consideration when buying in new neighborhoods. If there is a glut of available properties in an area, you might want to talk to your Realtor about why so many other investors are selling at once, or why deals are taking so long to close. Absorption rates of 20% or more mean that homes are selling quickly.