I am an advocate of getting involved in investment real estate, if you are in the right position to do so. Here are 10 basic tips that I have if you are considering buying rental properties.
1) If you don’t have more than a couple of thousand dollars in liquid savings, then I would forget the idea. It might still be possible for you to be successful, but you will be sweating it out a lot at the beginning. All it takes is one little thing to go wrong. You might not get it rented out right away. You might have emergency repairs. You might have bigger closing costs than you expected. Your insurance might be higher than you originally thought. Save some more money before buying a rental property.
2) If you do take the plunge, don’t try to get the highest rent possible. If you are trying to get $1,000 per month and it sits empty for two months, you would have been better off renting it at $900 per month and getting someone in there right away.
3) If you find a tenant who is low maintenance and pays you on time every month, then don’t be anxious to raise the rent. You are better off keeping the person happy and staying in there longer. Continuity is important. If you can find a long-term renter, then be happy, even if you are charging on the low end.
4) When you first buy a place or if you are getting new tenants, then you should certainly clean it up and make necessary repairs. But don’t go high end. Most people looking to rent are not looking for high end things. You don’t have to buy stainless steel appliances. You don’t have to get expensive hardwood floors. You don’t know what your tenants will be like. You don’t want to spend a lot of money on something that may not be well cared for.
5) If you had bought a place five or ten years ago, you may have actually been better off getting a variable rate loan. However, I see this as a risky move now. If interest rates move higher quickly, you are going to want have a fixed rate loan. I would recommend locking in a fixed rate loan, unless you are planning to pay off your mortgage very quickly.
6) For most people starting out, you should probably get a 30-year loan. While the interest rate might be a little better on a shorter-term loan, allow yourself the flexibility. You want to have manageable payments, particularly at the beginning.
7) While I recommend a 30-year mortgage for most people to start, don’t be afraid to pay off your loan in the longer term. Isn’t that the ultimate goal? Eventually, you will want to have rental property that is owned free an clear so that you can make a substantial income from the rent you charge.
8) If you have a lot of cash in the bank, I am not opposed to buying a rental property free and clear, as long as you will still have plenty of cash left over. Not only do you avoid paying interest on a loan, but you can also find better deals with the ability to close quickly. Most sellers would be willing to sell for a few thousand dollars less to someone who is willing to close within a couple of weeks, as opposed to a couple of months. Having cash in the bank allows this possibility.
9) You should generally buy rental properties that are located in a decent neighborhood. You will be more likely to attract good tenants who will pay on time and take care of your place. In addition, do not buy in too nice of a neighborhood or buy too big of a house. You will get a better return on your money with a basic 3 or 4 bedroom house than you will with a 6 bedroom mansion.
10) You should generally only buy a place that will generate positive cash flow, assuming you are making a down payment of somewhere between 10 and 20 percent. You should definitely not purchase anything that is going to produce negative cash flow on an ongoing basis. It simply doesn’t make sense and it is a bad use for your capital.