Purchasing Your First Rental Property
Investopedia talks about real estate, “Real estate has produced many of the world’s wealthiest people, so there are plenty of reasons to think that property is a sound investment. However, experts agree, as with any investment, it’s better to be well-versed before purchasing your first rental property with hundreds of thousands of dollars.”
Purchasing Your First Rental Property
- Purchasing your first rental property to earn income can be a risky venture. Go into this business having read everything you can on real estate investing.
- Similar to purchasing a home, buyers will usually need to secure at least 20% downpayment for the property. There are ways to get 100% financing but you will need a list of private investors.
- Being a landlord requires a wide range of skills, which could range from understanding basic tenant law to being able to fix a leaky faucet.
- Experts recommend having a financial cushion, in case you don’t rent out the property, or if the rental income doesn’t cover the full mortgage on the property. That also means that you pay off personal debt.
Six Red Flags With Any Rental Property Purchase
- The deal isn’t within your budget. As the real estate market fluctuates and shows more favor to sellers, it’s tempting to spend more cash on deals you would otherwise pass on. While the market does shift, numbers don’t lie. If you can’t afford to take the investment risk, don’t do the deal.
- The asking price is too low. Properties in certain areas may carry a lower list price because there’s a motivated seller or there are other issues like needing costly repairs or structural damage that would drastically cut the property’s value. If it seems like too good of a deal, it probably isn’t or needs more investigation.
- There are gaps in the title. If you spot irregularities and discrepancies with the property title, the likelihood of the investment going through shrinks, if it’s unclear who actually owns the property according to tax records or if the owner isn’t the person trying to sell the property, you may not be able to secure title insurance.
- It’s a stale listing. If the property has been sitting for a while, you need to find out why. Properties that have spent years on the market likely present a challenge that other buyers didn’t want to tackle. Do your due diligence and investigate the property thoroughly before entering a deal.
- A high number of vacancies. For multifamily properties, a high vacancy rate is often a symptom of a more significant challenge. Speak with the tenants and neighbors of the area to get a feel for possible issues.
- The local economy is on a downturn. What has happened in the market over the last few years? If the census shows the population is dwindling, jobs are becoming more scarce, or the local government isn’t investing in roads and infrastructure, it may be challenging to sell or rent the property. Consider how attractive the market is as a whole, not just the investment property.
In Summary:
Keep these six red flags in mind as you Investigate any rental property purchase. Do your due diligence to protect your investments and partner with a closing firm that has your best interest in mind.
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