Buying A Rental Property? Know This First!

October 18, 2021 Shauna

Like the idea of investing in real estate for consistent passive income or retirement? Buying rental property can be a great way to invest for the long term and generate monthly income. Like any investment, do your own research for the pros and cons before making any decision. Above all understand what your goals are and your appetite for risks owning rental property involves. 

The following questions and tips can help guide you while you think about purchasing a rental property.

 Is it a good time to buy rental property for you?

Start with reviewing your current financial situation to know if buying investment property makes sense for you at this moment. While reviewing your financial capacity try addressing the some of these points:

Can you make a sizable purchase like real estate and still cover your existing financial obligations? Buying real estate needs stable income, at least 5% of the purchase cost as down payment.

Is your credit in good standing? Most financial institutions such as banks and mortgage lenders look for above grade credit history and good debt payment standing. If you are in the process of building your credit history check out the article on our rental blog to know how credit scores work and what is a good credit score for mortgage approval

Do you have the minimum down payment you’ll need to secure financing? As stated above you need 5% or more of the property value to offer as a down payment. Now if you have a primary residence with either full or majority of mortgage principle paid, it could potentially be used as a financing source. If you don't have a down payment or are building your credit history, rent to own properties can offer a non-conventional way to own real estate.  You can check Is Rent to Own Home A Good Idea For You article on our rental blog for more details.

Did you factor in the closing costs into your rental property purchase expenses? This is sometimes a missed item on most home buyers mind when they are seen scrambling at the last minute to close their rental property purchases. So to be on a safer side budget about 1 -2% of property cost towards this. 

Does the property need any repairs before it could be lived in or it’s rentable? You must have the money to pay for these repairs and the costs to carry the mortgage until you’re able to rent it. 

For step by step guide to buying and managing rental properties check this eBook on Amazon now!

Advise on searching for rental properties

As you screen through potential properties, below considerations will be helpful to pin point your search for rental property purchase:

Know what type of rental property to buy?

As a first time investor of rental property, you may start with condos and single-family homes, however experienced investors know that multiplex units are generally more likely to be cash flow positive With property. Also when it comes to cash flow positive rental properties, the bigger is not always better as it more likely means there will be more taxes and more space to maintain; while on the other hand the incremental rental income may not cover your additional tax or maintenance expenses.

Rental property location is important

In real estate location is of utmost importance be it is residential or commercial property. To attract high quality tenants, look for a property close to schools, hospitals, public transportation, businesses, retail, etc. Focus on neighborhoods where demand for rental properties is strong and expected to remain so for the immediate future.

Assess the local job and economy

The price you’ll pay for a rental property will depend on a number of factors including on number of rental properties for sale in the neighborhood. A healthy and growing job market will likely spur demand for housing and may result in rising rental income. Also check on any major improvement projects planned (like a mixed-use retail residential development, subway stop or health clinic) could make the location more attractive to potential renters. 

Does a purchase make financial sense?

All investments come down to opportunity of potential returns and risks. Investing in rental property should be considered a long-term investment that helps build capital. Also you'd have to compare your rental property purchase with other available investment avenues and expected potential returns to decide if it makes sense over those investment options.

Take professional advise

To start off the bat, work with a team of professionals to seek advice on real estate, legal, tax and financial decisions. Obtaining the right advice upfront is crucial and it could save you money in the long run not just by ensuring you buy a great property at a great price but also to eliminate or not investing at all depending on the real estate market or broader economy. Once you find the right rental property, consult an investor mortgage specialist to discuss your financing options. 

Did you find this blog helpful? If yes, please comment yes below! Have a follow up question! Let us know and we'd be happy to address it. 


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About the author: Sauna is passionate about real estate and frequently writes in online industry magazines columns. The views expressed are her own. About the Editor: Shawn Verma is Technology & Real Estate Expert and published author. He is an experienced technology and real estate professional with over 25 years in the technology and real estate expertise. He writes about latest trends in Technology and Real Estate in blogs in online industry magazines and groups and social media.