If you are looking for a long-term investment that can provide passive income, then you may want to think about buying your first rental property. When managed well, a rental property can house tenants for several years with minimal turnover. Keeping the house in good working order and staying proactive about maintenance can prevent major issues and make your tenants feel comfortable.
However, there are a few things to consider if this is your first foray into the world of property investment.
Take these five things into consideration when you buy your first rental property to make sure you invest in a home that is profitable and low stress for your lifestyle.
#1) Keep an Eye on Property Taxes
One rental property owner shared her top lessons of what she wished she knew about having an investment property. Her top lesson was to watch out for property taxes.
The landlord watched her property taxes increase 300% overnight because she now owned a second property that she doesn’t live in. Unfortunately, she had based her rent on her previous mortgage and tax calculations, not accounting for the increase in taxes. This significantly cut into her profit and made her adjust her rental fees for the next tenant.
#2) Build Operating Expenses into Your Investment Plan
Even the most low-maintenance tenants will create expenses for you. There are basic operating costs you may include with rent (like electricity and water) along with unplanned maintenance (like broken appliances or home repair issues).
The team at Investopedia encourages landlords to follow the 50% rule when it comes to managing an investment property: if you plan to charge $1,000 per month in rent, set aside $500 monthly for maintenance.
You may want to create a separate bank account for your rental property management. You can deposit 50% of the rent check there each month and roll over the profits if you don’t use them. This way, you will have enough in the bank if you need to pay for an $8,000 roof replacement or quarterly pest management services.
#3) Choose a Low-Cost Home for Your First Property
The larger the home you invest in, the more expensive the maintenance will be. There is more that can go wrong, the electric bill will be higher, and you will need to pay higher home insurance rates and taxes. If you are looking to buy your first rental property, consider starting out small.
Condos and townhouses tend to require less maintenance because they are part of a larger building. Most also don’t have yards or trees that need to be maintained by the owner. There are also some neighborhoods where more aspects of maintenance are covered by the homeowners’ association. This could also be a good option if you want to make sure the exterior of your home stays in good condition, but you also have to factor in homeowner association costs that come with condos and townhomes.
#4) Be Picky About Your First Property
As you look to buy your first rental property, follow the same process to determine whether a home matches the quality and expectations you would expect for your own. You will have a hard time charging rent or finding tenants if you buy a dirty or poorly-maintained home and expect people to move in immediately.
Look for rental properties near schools and in safe areas (not near a highway or busy road) if you are looking for a family-friendly home that might house children. Look for homes next to city nightlife and major employers if you want to find condos that could appeal to young, single adults. If you want a large number of people to be interested in your place, make sure it is a desirable property in a good area.
#5) Start With One Rental Property for Your First Year
Some people make rental property management their career. They invest in several homes within their city and manage each home throughout the week, profiting from the rental payments. While this may be your end-goal, start small and only invest in one house at a time.
Spend your first year understanding how your taxes work, setting up rental agreements, setting aside funds for repairs, and determining how much time property management will take. This will give you an idea for the mental and emotional burden that comes from your investment.
After a year or two, you may be ready to buy another property and grow your investments, bringing your lessons with you each time.
Hire a Realtor® Who Specializes in Rental Property Investment
If you need more information about finding and buying your first rental property, reach out to a Realtor® who can help you identify potential rental properties in your area. This person can be a source of information and support as you work through the purchase process.
Effective Agents can help you find the right Realtor® for your needs. We use a data-backed algorithm to sort through potential Realtors® using the criteria that you set. We never overwhelm you with options and work to consider your unique situation in our search results. Give our tool a try and see if you can find a Realtor® who works for you.