If you are like me, you probably thought at one point or another about buying your first investment property. Owning a property and collecting income off it is a dream for many people. A rental property can generate regular income, which can be used to build long-term wealth. Many people start out with one property and eventually end up with two, then three, and then four and they continue to build on that. Before you know it, you have multiple properties bringing in enough revenue that you can make that your career and eventually retire.
Here are a few ways to help you meet your financial goals and prepare you to buy your first rental property.
Table of Contents
1. Calculate Rental Property Purchase Costs
Becoming a successful property owner requires a lot of planning. Before buying anything, you will need to calculate how much money you will need, such as down payments, inspection fees, and more. Check out some fees that you should consider before making the jump:
- Down payment
- Real estate transfer tax
- Home inspection fees
- Legal fees
- Loan application fees
- Appraisal fees
2. Down Payment
Financial institutions have different rules when it comes to rental properties. Compared to regular homes where you might only need 5% down, rental properties might require at least 15% as a down payment. Figuring this out is one-step in the process of becoming an investment property owner. Consider how long it will take you to save for the down payment and how you will be able to do it.
One way to get around a large down payment is a FHA loan. It is a government program that allows you to put as little as 3.5% down for a home loan. This loan does not work for rental properties so to get around this you would need to buy a duplex. You would live on one side and rent the other side out. With a FHA loan, you will need to live in the property for 1 year. If not, you will have to pay a fee.
This way of doing it is great because after a year, your combined payments along with the renter’s payments will give you a large pool of equity to work with. You can use the equity of the duplex to put down on your next home where you will live. The side of the duplex you were living in can now be rented out and now you have two revenue sources coming in from one property.
3. Save Strategically
The hard part is coming up with the money needed for your investment property. If you have not done this already, organize your finances and come up with a budget for yourself and your family. Use your after-tax income as your basis and factor in all your monthly expenses. From here, factor what you want to save towards your investment property and what you want to save for other stuff, such as vacations, emergency funds or miscellaneous items.
Learn to do your own repairs so you can save money around your own home and your rental property. You could save thousands every year by doing it on your own.
4. Research Financing
Unless you have some cash lying around for your purchase, you will need to go to a financial institution to get a loan to purchase your investment property. The amount you qualify for will determine what kind of investment property you can afford.
Keep in mind that it is wise to see what you are approved for before searching for properties. For example, let us say you are looking at a rental property and it is going for $300,000. You have $50,000 ready for a down payment but the loan the bank qualifies you for is only $225,000. That means, you still need an additional $25,000 to purchase that property. That is why it is a good idea to research rental property finance options early on in your quest to buy a rental home.
5. Don’t Forget Miscellaneous Costs
Be mindful that being a property owner is not a get rich quick scheme and will require work. You need to pay attention to everything to make sure your first investment property is a success. You must factor in additional costs and fees such as taxes, HOA fees, insurance, repairs and management fees if you decide to outsource that part.
Some experts suggest that you save 50% of your rental income for these additional costs. Even if you do not need the full 50%, the extra cash will pool together and create an emergency fund if you should need it.
6. Avoid These Mistakes
Research is key if you want to be successful in this endeavor. Learn everything there is to know about rental properties, such as common pitfalls and common issues that arise. Always include pitfalls into your budget, here are a few more to consider:
- Taking into account for repairs.
- Emergencies that happen.
- Not knowing landlord and tenant laws.
- No budget for lawyers or insurance.
You are doing this to make yourself and your family financially free. That means you need to take the time to carefully research everything before you dive into this. Do your own repairs, be smart with your money, and learn the laws on what you can and cannot do, and make sure you budget correctly. This is your life and your finances, do not slack off. You make the life you want and get out of it what you put in.