Are you ready to take your first serious steps toward financial freedom? If so, you’re probably looking at rental properties. Investment properties are a risk, but they offer great rewards when you step out carefully.
9 Tips for Acquiring Rental Properties
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1. Start With Single-Family Homes
Single-family homes are a lot easier to get started with than multi-family units or apartment buildings. Financing is more straightforward, there’s only one tenant to vet (and evict, if something goes wrong), and there’s not as much wear and tear on your property. Tenants tend to take better care of single-family homes than multi-tenant properties, so you’re limiting your risk in every way as you start out.
2. Don’t Confuse Cost and Value
Cost is what you’ll pay to acquire the property and fix it up. Value is what it’s worth once you’re done with repairs or remodeling. These aren’t the same thing, and you need to keep a good ratio between them. Just because a property appears cheap doesn’t mean it’s going to offer a good return on investment once you pay for all the repairs. A CAP rate, or capitalization rate, of 7% is perfect to shoot for.
3. Look for the Big Three
Whenever you consider an area for investment, look for three essential qualities:
- Steady job growth
- Steady population growth
- Low cost of living
When you see these three, you know the area is in the process of development. People are moving in for jobs, and prices are still low, so it’s the perfect time to invest. Your property will gain equity as the area becomes more popular.
4. Stay Cash-Flow Positive
If you can’t afford a large enough down payment to keep up a steady cash flow, consider waiting a bit before you buy a property or try looking somewhere else. There are always expenses you weren’t anticipating when you buy real estate, so always leave yourself a cushion. That same cushion will be valuable if the economic situation suddenly changes. Positive cash flow also allows you to safely hold onto a property for longer if local property values dip for a while.
5. Look at Turnkey Properties
Turnkey properties are ready to rent, and you can start making money as soon as the sale goes through. In some cases, they’ll come with tenants already in place. These are always going to be more expensive, but they offer far less risk to the first-time investor than a fixer-upper. Even if your return on these properties is relatively low, so long as it’s not too low, you’re still building for the next investment and learning all about managing your property along the way.
6. Talk to the Neighborhood
If you’re considering a property, walk around and talk to the neighbors. Find out what they like about the area. Find out if they’ve had any problems with the landlord or tenants of the property you’re considering. Be sure to visit the neighborhood during the day and evening, so you have an accurate picture of what it’s like. If you don’t, prospective tenants might, and you’ll be left wondering why no one wants to rent a place you thought was perfect.
7. Save Money By Living Where You Rent
Consider buying a large apartment and living in one room while renting out the rest. Or, get a multi-family property and live in of the units. If you live where you rent, you qualify for an FHA mortgage, which offers good interest rates with lower down payments. Use the rental income to pay off the mortgage quickly so you can sell and invest in something even better.
8. Buy a Single-Family Home Near Apartments
Apartment life is only attractive for so long. Eventually, apartment renters start looking to trade up to something where they don’t have to fire up 30 decibels of white noise in the baby’s room just to mask the noise of arguing neighbors upstairs. If your single unit is nearby, you’ll find it easier to rent and won’t have to spend much time or money on advertising.
9. Know the Local Regulations
Cities (and now even states) with rent control are dangerous places for inexperienced landlords. With rent control, you may find it nearly impossible to make repairs and do basic upkeep on a property because you can’t raise rents enough to pay for them. Yet tenants (and often the law) demand you keep up with it all. Make sure you know about rent control, applicable local regulations, and even the attitude of the local courts towards landlords. Talk to other landlords in the area to get the lay of the land before you buy.
One Final Tip
Keep all these tips in mind as you look at rental properties, but the biggest tip of all is this: get started. Whether you’re at the stage where you need to build income for a down payment or you’re already poised to buy, don’t let the grass grow under your feet. The sooner you start, the sooner you’ll achieve the financial freedom you deserve.
