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Start Small, Dream Big: Tips for Buying Your First Rental Property

01/25/2024 - Smart Home Buying & Ownership

Model house and a stack of gold dollar coins.

Start Small, Dream Big: Tips for Buying Your First Rental Property

With the right strategy and guidance, investing in your first rental property can be a lucrative move.

Are you ready to take the leap to become a landlord? Buying your first rental property can be an exciting – but also overwhelming – experience. Let’s look at some of the benefits and risks of buying a rental property, what to look for when you’re house-hunting, how to estimate return on investment and cash flow, and ways to get financing.

Finding the Right Investment

Before you start looking at properties, it’s important to think about what you want to achieve with your investment. How much money are you looking to make monthly? Are you interested in long-term rental or vacation rental properties? Understanding your goals will help guide your decisions throughout the process.

There are many benefits to owning a rental property:

  • You can earn passive income as rent checks flow into your account each month.
  • You could get substantial tax deductions, such as for mortgage interest and repairs, depreciation, and property taxes.
  • You will diversify your investment portfolio.
  • You may see potential appreciation in the value of your property over time.

But there are also significant risks:

  • Real estate isn’t a liquid asset, which means the funds you invest are tied up for the long term.
  • While your mortgage payments may be fixed, taxes and insurance premiums can increase.
  • You will have to manage tenants and handle repairs yourself or pay out of pocket for contractors to take care of these things.
  • If the neighborhood goes into decline, your investment could depreciate over time.

Measuring Risks vs. Rewards

To make the right decision, you’ll want to measure the risks against the rewards and determine what you can afford.

Here are some tips to consider when you’re looking for a rental property:

Know the neighborhood. The location of your rental property is among the most important factors to consider. Look for properties that are in areas with strong demand for rentals, such as near great schools or popular tourist destinations. Consider factors such as the local job market, schools, and transportation options.

Know the market. Before buying a rental property, it’s important to know the market and research current rent prices, vacancy rates, and population growth to make informed investment decisions. You can enlist the help of a real estate agent who’s an expert in the area.

Know the property. Before making an offer on a property, it’s important to thoroughly evaluate its condition. Consider the age and quality of the roof, plumbing, and electrical systems. Look for any signs of water damage or pest infestations and consider the cost of any necessary repairs or renovations. If you have experience doing major home repairs or know someone who can do quality renovations for a reasonable price, you might investigate fixing up and flipping a house.

Know your budget. It’s important to determine how much of a down payment you can afford. You’ll also want to consider factors such as the purchase price of the property, closing costs, property management fees, and any necessary repairs or renovations. Remember that you must also set aside money for ongoing expenses such as property taxes, insurance, and utilities.

Know the laws. This includes taxes, zoning regulations, and your state’s landlord/tenant statutes. Some areas have restrictions on the number of rental units that can be in one building, while others have restrictions on the type of property that can be used as a rental.

Understanding Return on Investment and Cash Flow

To assess the feasibility of rental property investment, it’s important to calculate both the return on investment (ROI) and the monthly cash flow.

ROI is a function of net income and price. It tells you how profitable a rental property could be over the long term. To determine the ROI, take the total anticipated net profit earned on the investment and divide it by the original cost of the investment. For a more precise calculation, factor in your down payment, mortgage cost, and projected cost of repairs and maintenance. Alternatively, if you trust the seller’s figures, take the reported total net profit earned and divide it by your original investment cost.

Cash flow is a function of rent and expenses. At the end of the day, it’s how much money is left over each month after all expenses have been paid. To calculate cash flow, take your rental income and subtract expenses, including debt.

Knowing How to Get Financing

To finance a rental property, unless you plan to pay in cash, it’s important to consider the financing options available. Obtaining a mortgage for a rental property involves stricter qualifying requirements than a mortgage for a primary residence. However, the first step remains the same – getting preapproved by a lender.

Your lender will assess your income, assets, debts, and credit report. You’ll find out how much of a rental property you can afford, so you can make the strongest possible offer.

You may also have some other options beyond a conventional mortgage, such as:

  • Asset-based loan. You might qualify for a loan based on the property’s cash flow potential.
  • Home equity loan. This is a loan based on the value of your primary residence.

Buying your first rental property can be a rewarding investment opportunity. To ensure a successful experience, it’s important that you do your research, set a budget, find the right location, thoroughly inspect the property, and work with experienced professionals, such as a real estate agent and your local WesBanco Mortgage lender.

Considering buying a rental property and ready to make your move? Speak to someone today.

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Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed do not necessarily represent the views and opinions of WesBanco.

While we hope you find this content useful, it is only intended to serve as a starting point. Your next step is to speak with a qualified, licensed professional who can provide advice tailored to your individual circumstances. Nothing in this article, nor in any associated resources, should be construed as financial or legal advice. Furthermore, while we have made good faith efforts to ensure that the information presented was correct as of the date the content was prepared, we are unable to guarantee that it remains accurate today.

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