Buying rental property can become a fantastic income source, however both the learning curve and the penalty for mistakes can be high. Many beginners cost themselves in time, money and stress by making mistakes that could have been avoided with a bit of research and forethought.
This guide will take you through the basics of buying rental property, help you avoid basic mistakes and improve your profits with some simple and easy to follow steps.
Time spent researching and learning now will save you in the long run and make sure your rental property or properties are fun income-generators rather than stress-inducing money sinks.
Your first step - assessing your finance options
For many people new to buying rental property their first step starts with looking at property and dreaming about what they are going to buy - this is also their first mistake!
Your first step should always be to assess your finance options. If you are buying property to rent out then the process must be treated as a business process, because you are essentially starting a new business!
Before looking at any property you first need to work out what you can sensibly afford and then stick to that decision.
Unless you are fortunate enough to have a large bankroll, buying rental property is likely to involve a mortgage, so your first meeting needs to be with a mortgage broker or the person at your bank who is responsible for mortgages.
You will get the best possible advice if you deal with someone who is a specialist in buy-to-rent properties, and ideally they would have their own properties which they rent out as they will be best-placed to give you advice on what you can afford.
Step two - creating a buying criteria
If you've done step one you've already got the first item on your buying criteria, the budget, but just buying any house that is within your budget isn't a good idea.
There are a huge range of factors that affect the profitability of a building when it is bought to rent and if you want to make the most money possible while reducing your risk of losses you need to take these into account.
We've created a list of some of your most important considerations here:
The Property - The house itself will be the cause of your most immediate and obvious costs. Work that needs doing immediately will need to be paid for before you can rent a house out.
The older the house and the appliances inside the more likely the house is going to cost you more on maintenance. Items like boilers aren't cheap and represent a large potential cost for repair and replacement. Check these details before you buy.
Neighborhood - The neighborhood where your house is will dictate who is likely to live there as well as affecting how much they are likely to pay and how long they are likely to stay.
Houses in areas popular with students will see a high turnover in occupants while a neighborhood near a school is likely to attract families who will stay for longer in the same home.
Demographics - Related to the neighborhood - what type of person is generally attracted to live in this area?
If the neighborhood attracts mainly families then buying a bachelor pad may not provide a wise decision and you may need to do some refurbishment to attract more interest.
Schools - For many families the quality of nearby schools is one of the most important factors. The better the schools are near your prospective property the easier it will be to rent out to families.
Jobs - It is a general rule that people go where the jobs are. Buying rental property in an area where the main industry is in decline is going to make it harder to rent out.
Buying rental property in an area that is booming may be more expensive - but more jobs, higher wages and higher demand will allow you to find tenants easier and charge higher prices.
Current Demand/Supply - By tracking the rental market in the area you can assess what the current supply and demand for rental properties is.
Ideally what you will see is rental properties quickly disappearing from the market because tenants are moving in. If you see many properties offered for rent for months at a time this is a sign demand is low.
Average Rent - The average rent of similar properties in the area will give you a good idea what you can charge.
Insurance Costs & Property Tax - Other costs like insurance and tax need to be taken into account. These will vary depending on where the property is located.
Step three - Looking for your ideal property
Once you have decided on the criteria that will help you select a profitable rental property you need to stick to that criteria.
When searching you will undoubtedly find some great pieces of property that don't quite match your criteria - they might be a bit out of your budget, need a little more work to do on them or be a great property for a great price but in an area that has low rental demand.
Don't buy them if they don't meet your criteria!
There are plenty of places online for buying rental property, have a look at some of these websites and don't forget to visit your local MLS office:
Step four - Due diligence and purchasing your property
By this stage you should have your finance options in place, have created your criteria for buying rental property and then gone out and found a suitable property and made an offer.
Before you reach your closing date you need to do some due diligence to check that what you're getting really is as good as it looks.
To do this you will need to get an inspector who will come out and inspect the property to look for things which may cause you problems in the future. Doing this could easily save you thousands of dollars in the event of the inspector finding something serious.
Assuming the inspection goes well you will shortly become the proud owner of a property ready to let out to tenants. If you've done your research and created your criteria well you should have no problem renting your building out and starting to make money which can go towards your next property.