It is almost always exciting to think about the potential that any property investment holds, particularly when you’re new to the business. While buying your first rental property is almost certain to be a lucrative maneuver, it’s important to proceed with care.
The good news is that all of the most common property investment mistakes have been made before, and with careful, in-depth research, you’ll find it easier to avoid them. Our real estate pros have been in your shoes: begin your quest for knowledge by using their investment tips to your advantage.
1. Still renting? Buy your own home before you invest in a rental.
There are tons of reasons to rent instead of buying your own home. But purchasing your own residence before you invest in rental property gives you real-world experience while easing your way into the financial side of things. When you buy your own home first, you’re likely to get better interest rates plus you’ll need a far lower down payment. There are tax write-offs to consider, too. When you’re ready, upgrade to a new home and use the old one as a rental, or continue to live in your home and invest in a second rental property.
2. Let logic win the day.
Emotional decisions have no place in real estate investment. It’s fine to listen to your heart when choosing your personal residence but think logically when purchasing property as an investment. When emotions intervene (and they’re likely to!) remind yourself that this is a business decision.
Speaking of logic, Samantha Bell of Portico online letting agents, gives one more piece of advice to remember: “Screen prospective tenants and do tenant credit checks and background checks – even if they seem like fantastic people. Proper vetting will greatly reduce the likelihood of disastrous renter-landlord relationships.”
3. Know your market, know your audience.
What type of clients do you hope to attract? Who do you envision renting to? With the anticipated needs of your target audience as a primary consideration, let research inform your decision. Ensure that the location will appeal to the clients you have in mind. When you do, your property will be far less likely to sit vacant. You should also consider whether you are going to utilize short-term lets or holiday lets or just stick to long-term tenants. While long-lets offer stability and potentially less work, holiday lets typically offer higher returns and more tax relief opportunities.
4. Clear your debts before you ask for investment loans.
If you have student loans, lots of consumer credit, outstanding medical bills or other significant debts, pay them off before you look into investment loan options. Debt is a necessary part of life for most of us creditors who finance investment properties. Yes, you’ll have to wait a little longer to invest in real estate if you pay off your debts now but it’ll put you ahead of the game in the long run.
5. Secure a down payment and create a budget.
If you’ve been considering property investment for a while, you might already have financing secured. If not, make sure that you’re prepared with a 20 percent down payment and you have researched the best mortgage. Create a strict budget not just for your purchase, but for maintenance and any renovations, costs associated with securing tenants and potential emergencies. Let your budget guide your investment decision.
6. Ensure positive cashflow.
Purchasing an affordable property that won’t need tons of repairs or updating and making a large down payment are two simple ways to limit risk and get your property into positive cash flow territory. It’s true that you won’t be in the black until your property rents. Re-read tip #3 if you skimmed over it.
7. Get to know the neighborhood.
Before investing in property, talk to the neighbors. Check out the property and the neighborhood at different times of day and on weekends. Let people know that you’re thinking about purchasing the property and see if they have anything to tell you.
8. Get advice from someone who’s been there.
There is no need to reinvent the wheel. Since finding and keeping tenants can be a challenge for new investors, consider joining a landlord association, where you can get real-world advice for your local market.
9. Get onboard with a property management company.
Property management companies have come a long way. These businesses continue to handle essentials like basic landscaping, late-night emergency plumbing calls, and readying properties for routine inspections, but there’s a lot more they can do for you. Check around to see what’s offered and compare prices.
Anthony Vaarwerk of Find Rentals, the vacation rental managers, says, “Some property management companies handle everything from advertising your property to screening potential renters to collecting rents online. Think about what your budget can handle and consider whether you have the time (and fortitude!) to deal with these demands on your own.”
10. Get a turnkey property if you can.
Great renters already in place and not thinking about leaving anytime soon? No renovations or upgrades needed? Turnkey properties might represent a larger initial investment but they’re far more likely to bring you into positive cashflow territory quickly.