Though many first-time real estate investors begin with house flipping, I chose a different route at the beginning of my career. I was intimidated by the idea of completely renovating a home to flip and wanted to keep earning steady income without having to work in an office all day. My first real estate investment was an income property—a home that I rented out at a monthly rate. I thought being a landlord would be easier than trying to flip a property for the first time, but I must admit, I was unprepared for all the challenges involved in buying and owning an income property.
Buying an income property as a new investor isn’t a bad idea, but you need to be better prepared than I was if you want to avoid the headaches and financial pitfalls I had to deal with. Luckily, you can learn from my mistakes with these tips for how to buy income property.
How to Buy Income Property: 7 Tips to Get You Started
An income property can be anything from a single-family home to an apartment building, or even a recreational lot or commercial building. The goal with an income property is to make enough from rent to cover the mortgage and earn an additional profit. Before you choose an income property to invest in, you should consider the following advice.
Assess Your Ability To Do Repairs on Your Own
As a landlord, you’ll be responsible for addressing maintenance issues and repairs on your income property. Are you generally handy around the house? Are you confident in your ability to perform repairs on your own, or will you need to budget for a professional to help you? Most new investors with only one or two income properties will do their own repairs to save money. If you’re not handy or you don’t want to be personally involved in repairs, you should ensure you have money set aside to cover the cost of a professional should the need arise—and trust me, it almost definitely will.
Pay Down Your Debt
Paying down your personal debt as much as possible before buying an income property is smart for multiple reasons. First, decreasing your debt can boost your credit score and help you get the best interest rates on financing. Also, you want to eliminate as many monthly payments as possible and ensure you have a cash cushion in case you’re not able to find consistent tenants right away. Making an extra mortgage payment without receiving any rental income to cover it can be crippling if you also have high credit card bills, student loans, or other monthly debt payments.
Choose the Right Location
When you’re looking for your first-income property, it’s important to research the neighborhood and keep an eye on the real estate market in the area. You want the property to be priced below the market, but try to avoid anything that requires major repairs. Since you’re not flipping the house to sell, the goal is to get renters in as soon as possible so you can start earning income. Choosing the right neighborhood is just as crucial as choosing the right property. You want to buy in a neighborhood with a stable or rising population, good schools, and lots of amenities and jobs nearby. You also want to make sure you’re not purchasing the best or worst home on the block; the best home will likely price you out of the area, whereas the worst home won’t attract quality renters.
Once you’ve decided on an income property, you’ll need to secure financing to pay for it. Some investors prefer to buy income properties in cash so they can avoid financing fees and monthly payments, but going this route means it could take years before you make enough rental income to start seeing a profit. If you decide to get a loan, you’ll likely have several options for financing, including hard money loans and personal bank loans. You may need a larger down payment to secure the loan than you would for an owner-occupied property, so expect to put down at least 20%.
Calculate Your Expenses
Before you set a rental rate and list your income property on the market, you should calculate your monthly expenses to ensure you get a good return on investment (ROI). Your monthly expenses for the property will likely include mortgage or loan payments, property taxes, and homeowner’s association (HOA) fees, plus maintenance, repairs, and any other incidental costs. A good rule of thumb is that your monthly expenses should equal about 50% of the rent you’re receiving for the property.
Insure Your Income Property
Purchasing homeowner’s insurance for your income property is a must; however, you can also get additional landlord insurance. In general, landlord insurance covers property damage, lost rental income, and liability protection. That means you’ll be protected if a tenant or visitor gets hurt as a result of property maintenance issues like a broken railing or leaky pipes. Most insurance providers will allow you to bundle your landlord insurance with your homeowner’s insurance to save money.
Research Your Legal Obligations
You should research the landlord-tenant laws in your state and city before you get your first tenant so you understand their rights and your legal obligations as a landlord. You need to know, for example, how much you’re allowed to charge for a security deposit and under what circumstances you’re legally allowed to keep it. You should also be aware of the eviction laws in your area so you can be prepared for the worst-case scenario. By researching your legal obligations ahead of time, you can prevent a lot of hassle in the future.
The Best Tools and Resources for Income Property Investors
Though I stumbled a bit with my first income property, I was eventually able to be a real estate investor full-time. But I never would have gotten this far without the help of HomeVestors®.
When I became an independently owned and operated franchise, I was assigned a HomeVestors® Development Agent, a veteran real estate investor in my city who provided me with one-on-one mentorship and expert guidance. Being a HomeVestors® independently owned and operated franchise also unlocked access to some of the best real estate investment tools in the industry, including the ValueChek™ property valuation calculator and a proprietary lending platform that connects me with some of the best hard money lenders in my area. With the help of the HomeVestors® network, I was able to conquer my real estate investment dreams.
Want to learn more about how to buy income property with some of the best tools and resources in the industry? Contact HomeVestors® now and find out how becoming an independently owned and operated franchise can help you achieve your real estate investment goals.
Each franchise office is independently owned and operated.