Investing in property for rent is a choice that more and more people are starting to make.
The fact that you are here means that you probably understand that buying property to rent makes sense as a long-term investment and may provide you with greater returns than traditional methods, thanks to the current state of the U.S. economy.
When the financial outlook for many millennials is bleak, this could be a real glimmer of hope.
However, nobody said that investing in rental property was an easy option!
The decision to make such a huge purchase is a major one, and it is not surprising that it often comes with a big side serving of stress.
The process is confusing, time consuming, and costly, with individuals often wondering where to even start.
The good news is that it doesn’t need to be this way.
Purchasing a rental property can be low stress if you follow our 5-step, no-nonsense guide.
We will lead you in the right direction to becoming a landlord, without ending up wasting your precious time and money.
Before we jump in, one thing to be clear about is that financing a rental property is different from financing a home property.
The process is similar in parts, but there are various aspects that you must be aware of.
We will cover them all in the following 5 stress-busting points.
1. Become A Rental Property Investment Master
The best way to avoid confusion, frustration and anxiety is to learn all that you can about the process involved in purchasing rental property for investment.
There are so many valuable tools readily available, including books, seminars, and courses.
So soak up as much of these as you can to be sure that you release any anxiety that may arise around being kept in the dark.
The most useful areas where you should consider widening your knowledge include:
- how to choose the right location
- how to assess the value of properties
- the difference between types of property for rental investments (eg home units, houses, land)
- current market conditions and anticipated fluctuations
- long-term strategies for rental property investment
In addition to this list, it is wise to investigate the demographics of the area that you are looking to invest in.
For example, if there are lots of students compared to families, that would impact the choice you make.
When you finally find a potential investment property, your ‘training’ shouldn’t end.
Be sure to check the condition of the house or unit, taking the time to ask contractors for their opinion.
Ideally, you should gather three written estimates for work to be completed.
Knowing how much money you would you need to spend to make the rental property attractive to tenants is key in making a worthwhile investment.
Finally, you should also find out how much similar properties in the area are being rented for.
You can look at classifieds for initial information, paying attention to incentives, such as ‘one month free’.
Such offers should be considered as red flags, as they indicate that there is competition amongst landlords to find suitable tenants.
Taking this a step further, you could also speak to locals in the area where you are considering purchasing a rental property.
Why not even act as a potential tenant and meet landlords at similar properties?
That is one way to guarantee access to insider information.
All of this knowledge arms you with valuable insight and understanding of the specific circumstances of the local market that you want to invest in.
Any time invested will pay back dividends in helping you to make wise decisions about purchases.
2. Execute Zen-Like Non-Attachment
Remember what we said about a rental property vs. a home property?
This is one investment that should be led by the brain, not the heart.
Don’t rush into purchases; have patience and treat it as a business decision.
Even if you have decided that you have no time to do your homework, as recommended in point number one, you should make sure to know how much you should spend on a property, in order to boost your chances of capital growth.
To ensure that you buy at the ‘right’ price, you need to know a few things:
- how much you can afford
- how much similar properties are selling for and renting at
- the cost to fix up the potential rental property
- in addition, it is useful to have an independent valuation completed, separate to the one done by the real estate agent (who will be earning a commission depending on the final figure).
With this information you will be able to recognize a bargain when one comes along.
And with the zen non-attachment that we mentioned, you will not let your heart lead you into non-profitable choices, simply because you ‘love’ the property.
Ideally, you should be looking to pay 10-20% below the retail market value for a property.
This is where you will see larger gains in the long term, which is what rental property investment is all about.
By keeping your head in the business game, you won’t have the stress of regretting your actions for years down the line.
3. Strike Out Alone
Real estate agents are fantastic, they know their industry and local market and have access to many properties that you may not otherwise uncover.
Their advice is often invaluable to the process; but, relying on agents can add stress to the process of buying a rental property.
This may seem counterintuitive, because an agent is surely there to relieve you of the majority of the work.
That is true, however, using a real estate agent may mean that you face stiff competition from other investors when it comes to making an offer to a seller.
By doing your own marketing and dealing with a seller directly, you may be able to negotiate more aggressively and land yourself a fantastic price.
Reduced competition at negotiation and a potentially lower mortgage repayment over the years = less stress for sure!
4. Seek Guidance Around Financing
Financing a rental property is complicated business, and the stress around this will be alleviated greatly by turning to professionals for advice.
It is imperative that you understand all of the costs involved, so that you aren’t faced with a nasty surprise halfway through the deal.
There are a number of loans that you should consider before choosing the right deal based on your individual circumstances.
For a rental property, there will typically be a down payment of 20%, but there are also closing costs (including taxes and escrow) to account for.
You should note that interest rates are generally higher for mortgages on rental properties than for home properties, due to the perceived extra risk for the lenders, when you are not so emotionally involved in the investment, compared with your own property.
Non-recourse loans are of interest to some new landlords. They are defined by www.investopedia.com as follows:
“A non–recourse debt is a type of loan that is secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral, but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.”
Other things to consider are whether your loan can encompass costs of initial repairs and maintenance, whether you can leverage equity from your own home, and if there are repayment penalties (which may hinder your ability to pay the loan early and save a substantial sum).
There are pros and cons to all types of rental property investment loans, and your financial advisor will be able to navigate the minefield for you.
To keep your head straight, try to look at the finances on a month-to-month basis (rental income and tax deductions compared to costs) as well as the longer-term strategy (capital gains).
Seeing the process in this way should help you to keep things clear and low-stress.
5. Hire A Property Manager
Once everything has been completed and you become a full-fledged landlord, the stresses don’t necessarily end.
In fact, many individuals report that actual ‘land-lording’ is the most stressful part.
Fortunately, this is something that you can avoid quite simply by hiring a property manager.
They are responsible for sourcing and screening tenants, performing background and credit checks.
They work in line with the law and are aware of the rights and responsibilities of both the landlord and the tenants – this can prevent much grey hair caused by inadvertently breaching tenant rights.
A property manager will also stay on top of the maintenance of the property and keep you informed throughout the year.
Yes, you will need to pay for this service; but it usually comes straight from the rent as a percentage, and this cost is tax deductible. Now that sounds worthwhile to me!
By following these 5 guidelines, you should find that investing in your first rental property can indeed be a low-stress process, which can lead to a very profitable outcome.