5 Things You Must Do Before You Buy A Rental Property

For rent sign in front yard

The real estate investing business is growing by leaps and bounds. Last year alone investment home sales jumped by over 7%. Many of these purchases were made by new investors buying rental properties.  While rental properties can be a tremendous addition to your portfolio they also have their own set of problems. Even though anyone can buy a rental property it doesn’t mean they will have success. Before you dip your toe in the rental property waters there are a few things you should do first that will help ease the transition. Here are five things you need to know before you purchase a rental property.

  • Focus On The Bottom Line. There are three common reasons that someone would take ownership of a rental property: cash flow, appreciation and tax benefits. The most important of these three is cash flow. This is the residual income that is left after all your monthly expenses are paid. With this money you can do whatever you like. You can pay down your property, pay off debt or reinvest it elsewhere. Banking on appreciation is always a dangerous game. Even though your value will most likely increase it is not a sure thing. There are many tax benefits that you probably aren’t aware of that can greatly change your tax return. This is certainly helpful and important but should be the reason you buy a rental property. Always look at the cash flow first and make your decision based on that number. When estimating cash flow make sure you are using real numbers and are conservative with any estimates.
  • Embrace The Journey. Before you even consider making an offer you should have some idea of what you are getting into. Owning a rental property is much different than every other type of real estate investing. For starters you need to accept that your down payment is going to be tied up for several years. This should be seen as a long term acquisition for you. Secondly, even if you hire a property manager there are still going to be times when you need to intervene. Unexpected issues will pop up either with the property or with your tenants all the time. You need to be ready to act as soon as issues present themselves. Finally you need to take your time and find a quality property that you can see yourself owning for several years. The location and price point are just as important on a rental property as they are on a rehab. There will be times that you question owning the property but in the end it will be worth it.
  • Understand The Numbers. It takes more than a good property to be successful. Like any other investment the numbers are the backbone of the deal. Most novice investors estimate cash flow by taking the rent received and subtracting it from the mortgage, taxes and insurance. This is the basic concept but there is more to it than just that. When estimating rent you need to not only look at the current number but you have to have an idea of where the market is headed. Even if it is on the rise you need to be conservative with your figures. When adding the expenses the mortgage payment is the core but there are many other hidden costs. You need to know what utilities you are going to pay and what they cost. You also need to factor in for vacancy, expenses, snow removal, lawn care, seasonal maintenance and property management. Added up these will have a huge impact on your bottom line. They can directly determine if the property is profitable and what your projected cash flow will be. Before you make an offer take some time to know all of the numbers involved in your deal.
  • Develop Your Team. Along the way you need to put together a team to help with the property. The first team member you need to reach out to is a real estate agent. They will be able to guide you through the process and give you advice on which markets are best and what properties may make the most sense for you. You also need to determine how much time and desire you have to manage the property on your own. Managing a rental property is a big undertaking. There are stretches when the property will run on autopilot and then out of the blue you will have three crises in a week. If you don’t want to deal with this you need to look for a property manager. They typically take 10% of the monthly rent but handle finding tenants, lining up handymen and dealing with minor tenant issues. Don’t wait to reach out to these people if you are interested in rental properties.
  • Tenant Systems. Your rental property success is based on the quality of your tenants. Whether you have a property manager helping your find tenants or search on your own your tenants are critical. You cannot gloss over the application and screening process. You need to accept that it may take talking to several tenants before you find the right one. A good tenant will make being a landlord almost seem easy at times. The wrong tenant will make every day a nightmare. Before you buy you should come up with a few strategies for finding new tenants as well as a system for screening them.

It is never too late or too early to jump into rental property market. A good rental property can be the backbone of your portfolio for many years to come.