How To Buy A Rental Property – 23 Tips Revealed

Do you want to know how to buy your first rental property? If so, you’ve come to the right place. This article covers some of the most important things you’ll need to know when owning a rental property.

When researching how to buy investment properties, the most crucial question real estate investors want is, “What is its purpose”? For example, are you looking for monthly cash flow or capital appreciation? Since 2008, finding properties with positive cash flow has become more complex and harder. Indeed, most properties today are financed with a mortgage, and the owner/investor has to cover a monthly shortfall. In exchange, the investor hopes the property appreciates well in the future and can sell it for a profit.

Buying Your First Rental Property

Finding good investment properties can be very challenging. Inventory is at record lows, and most people underestimate how complicated the acquisition process is. Put in the research and create an intricate plan for acquiring property. Indeed, this is the key to everything in this business, says Bill Samuel, Owner of Blue Ladder Development

Let’s dig in and explore everything you’ll need to have and know when buying rental properties.

Get Organized to Obtain a Mortgage

Generally, when getting organized for a mortgage, real estate investors will want an organized packet of information for the lender. I like to keep all my statements and documents in PDF form on my computer. Indeed, they are organized by year and statement type. No problem if I’m buying my first rental property and the lender requests two years of tax returns! I have them ready. Or, if the lender asks for a net worth statement, no problem, my spreadsheet is up to date! Indeed, owning rental property requires a certain degree of organization!

Another consideration is whether the bank will require a co-signer / co-borrower. Indeed, having a co-signer can increase your chances of getting the mortgage on a rental.

When buying rental properties in Singapore, it’s a challenge to find banks that offer a mortgage on such properties. In my experience, I found it easier to get a co-signer to be included as part of the owners. 

Cyrus Yung

2 Years of Tax Returns

Most lenders want the comfort of having two years of tax returns. Indeed, this is a minimum requirement. Real estate investors can get tax transcripts from the IRS or CRA (In Canada). One thing to note: If you owe money to the government, this should be paid off before you make it to the mortgage pre-approval process. Indeed, a zero balance with the taxman will be necessary to obtain a mortgage when buying a rental property, or any property for that matter!

Know What’s On Your Credit Report

You will likely be applying for a mortgage when buying a rental property. Indeed, one of the first things the credit officer or underwriter will do is check your credit. On the credit report, the underwriter will have access to information (including, but not limited to) such as:

  • Credit Score
  • Payment history/late payments
  • Bankruptcies
  • Charge-offs (Forgiven debt)
  • Loans, Credit Cards, and Lines of Credit
  • Credit limits
  • Closed accounts and inactive accounts
  • Mortgages

Get a Free Copy Of Your Credit Report

Real estate investors can download a copy of their credit report in several places. For example, you can use Credit Karma in the United States and Canada. Obtaining your credit report before applying for a mortgage will save you time and effort. And, if you can improve your credit score, you’ll possibly even get a lower rate on the mortgage. And for sure, that will save you money when owning a rental property!

Once you have a copy of your credit report, go through it carefully. For starters, make sure you don’t have anything negative showing up. If there’s something negative such as a late payment, ask yourself, is it accurate? Inaccurate negative info on your credit report will undoubtedly drop your score, leading to paying a higher interest rate on the mortgage. And don’t fret, rental property owners don’t need a perfect credit score when buying your first rental property. Instead, aim for a credit score north of 760.

Prepare A Net Worth Statement

A lender will want to see a real estate investor’s financial position even if their net worth is 0 (or a negative number). For example, do you have other investments (Savings, Stocks, other investment properties, etc.)? Naturally, you’ll want to list your debts here as well. A net worth statement can be beneficial when buying rental properties as it indicates your creditworthiness to the lender.

Pay Down Revolving Debts

Having too much unsecured/revolving debt can be a deal killer when buying a rental property. Remember your credit report? Double-check all the balances and monthly payments to make sure everything is correct.

The mortgage underwriter will almost certainly subtract your estimated monthly payment on each of your unsecured debts from your “affordability.” For example, your combined minimum credit card and car loan payments are $750/mo. In this case, your affordability could get reduced by as much as $150,000! As a result, paying down as much unsecured debt as possible is important before obtaining a pre-approval mortgage.

This list is not exhaustive, and not everyone will need all the information. But, if real estate investors have a small income but a large retirement account, it can always help their case.

Put Together Your Dream Team

A “dream team” working for you will surely be an invaluable asset and a contributor to your success as a real estate investor. I remember buying my first rental property at age 24 – it was my first! And I didn’t know any realtors, bankers, property managers, or other professionals. I did, however, know the place I wanted to buy. So, I reached out to a friend in the car business. And he put me in touch with my first banker. She was a loan officer with a credit union and “took a chance” on me. I’ll never forget the day I got my first mortgage. That relationship remained solid until she retired a few years ago.

Also, over the years, I’ve developed a network of trusted trades and professionals I can contact for pretty much anything. After thinking about it, and relative to buying a rental property, here are the different types of professionals I recommend having at your disposal:

Hire a Great Realtor

A good realtor is worth their weight in gold. When I worked as a realtor in Vancouver, I met many realtors, and some were good. So, if real estate investors don’t already have a realtor, it’s best to interview as many as possible, and don’t hesitate to ask for and check references! One of the best values I thought I could bring to the table was my team of experts, trades, and professionals who could assist with my clients’ every need. Whether it was a plumber to fix a broken pipe with 30 minutes notice, an electrician to inspect something, a property manager to give me their view, or a painter for a last-minute job, your realtor must come with a team.

Furthermore, a good realtor might work with different people, such as first-time home buyers or seasoned investors if you are looking to buy rental properties, whether a house or condo, your realtor should have a long history of working with clients who are similar to you!

Last, a good realtor will keep in touch after the sale. Indeed, potential rental property owners want their realtors to be there for them when they need them most.

Be Prepared to Pull the Trigger

Be prepared to move forward when the right property comes on the market and work with a Realtor who has their finger on the pulse, says Dave Brown *Personal Real Estate Corporation from Whistler Real Estate. Have your financing pre-approved, know the area or neighborhoods you want to be in, and don’t get caught up in trying to save a couple thousand when the opportunity presents itself.

Read more: How Many Jobs Are Available in Real Estate Investment Trusts?

Find the Best Banker/Mortgage Broker

a man who learned how to develop high income skills to earn more money

When buying your first rental property, you will quickly find that financing a rental will not be as easy as financing a single-family, owner-occupied home. Also, there will be differences between buying an investment property such as a condo vs. a house. However, a good banker or mortgage broker will help steer you in the right direction. Knowing what you can afford and being pre-approved will be incredibly helpful in your hunt. The last thing real estate investors want is to have an accepted offer on a home, only to find themselves scrambling for financing at the last minute.

Lawyer

While it’s true that notaries can do the conveyancing, if something goes wrong, you’ll need a lawyer. I often recommend using a lawyer when purchasing or selling a home. And in my experience, the cost difference is often negligible. Also, like any other profession, don’t hesitate to interview, ask questions, and provide references. It’s important to know that whoever you choose is educated and used to dealing with the same type of transaction you’re about to be involved in!

Investing in real estate in a city with a high demand meant there were many regulations implemented by the government and municipality on the rental of housing. As we are not lawyers nor real-estate agents, getting acquainted with all the various laws regarding real estate investing and renting real estate was quite challenging, says Anastasia Schmalz and Tomer Arwas, Co-Founders of Generation Nomads. For this reason, it’s best to acquire the assistance of an expert lawyer to ensure the investment will be according to the latest regulations. 

Accountant

An accountant can save real estate investors thousands, if not hundreds of thousands of wasted tax dollars over a lifetime. Further, a great accountant can steer real estate investors clear of potential obstacles down the way. A good accountant can ensure that your tax structure is set up correctly when buying rental properties. For example, are you buying the property in a company, trust, or individually? And what are the implications of each?

House Hacking (Buy a multifamily home)

When the time is right to start real estate investing and buy a rental property, you’ll need to decide what type of property to buy, where, and the budget to maximize rental income. To be sure, it’s essential that each of the following get proper consideration.

Buying a rental property such as a townhome (displayed) allows the owner to househack!

If you aren’t already a homeowner or buying your first rental, you might consider house hacking and buy a multifamily home instead. A multifamily home, such as a duplex, triplex, or fourplex, offers real estate investors the ability to live onsite while having the other tenants pay (part, if not all) the mortgage. Also, buying a rental property you can live in is a brilliant way to achieve financial independence! In my experience, living in or close to the investment property gives real estate investors peace of mind to resolve issues quickly. Also, you can be your own property manager and check up on your investment regularly to see that all is well.

Search For Positive Cash Flow

When I was searching for a house, I knew I was going to be buying rental properties. I know that rental property owners often have a positive cash flow from the rental income, while also living in it. I started searching for single-family homes with 2 kitchens that could be used as multi-family homes, which in Virginia, these homes sell fast. It took me quite a few tries over the course of 3 months to make an offer that didn’t get beat by all cash buyers or buyers that were offering way over market value. I ended up increasing my offer to get my first investment property, which was a challenge in itself to ensure I wasn’t overpaying and getting desperate just to get a property.

Andy Kolodgie, Co-Owner – The House Guys

Getting Credit For Rental Income

One giant benefit of investing in a multifamily home is that banks often “give you credit” for some rents! For example, if you’re buying a rental property and affordability is a little low, some banks can add a portion of the rental income to your personal income, thus allowing you more buying power. It’ll make it much easier to afford the property if they do. However, each lender is different, so don’t feel bad if you’re rejected by one company.

Location, Location, Location

Real estate is in my veins. Having owned investment properties since my early 20s, I can say it’s best to start investing in real estate when you’re young. And, always own a property that you would live in. To be sure, that includes the location, and it always applies when buying a rental property.

Some of the best locations for buying rental property are those close to transportation and shopping. For example, would you want to drive an hour for eggs and bread? Or, would you want to walk 30 minutes to the nearest bus or train station? Also, consider if the area is generally safe. Are you able to go out freely for a stroll?

Focus On The Purchase Price

One of the biggest mistakes real estate investors can make when buying a rental property is only considering the future sale price. Instead, when buying a first investment property, real estate investors need to consider the purchase price first. Indeed, considering the purchase price gives you full control over the first part of the investment (Do you have a crystal ball that tells you what the property will sell for in the future?).

Don’t Forget The Renovation Costs

Also, when buying rental properties, it’s essential to consider the cost of any updates or renovations to make the home livable. Indeed, it’s rare to buy a rental property ready to rent out because the asking price is usually too high. Of course, if you’ve found a diamond in the rough, a home ready to rent without making any updates or modifications, congratulations!

renovated kitchen high end

Be sure to have your inspectors, contractors, and architect evaluate your investment property thoroughly and give the scope/cost of work to be completed in writing. Exceeding a renovation budget can lower your return on investment and take you years to collect, says Chris McDermott, Real Estate Broker/Investor – Jax Nurses Buy Houses

Find Balance

Should renovations be necessary, you’ll also want to be sure to find a balance between too high-end and too low-end. For example, consider using durable, long-lasting finishes if you’re buying a rental property. Flooring, such as carpet or laminate flooring, might be attractive due to its cheaper price, however, rental property owners will note that it will not last as long as engineered wood. Also, going too high-end could cost real estate investors in the long run. Consider the image above. Would this kitchen be more suitable for a rental property worth $200,000 or $400,000?

Get a Home Inspection

Another important factor when buying a rental property is to have it inspected. Qualified, professional home inspectors will know what and where to look and find problems before they happen. In my experience, the best home inspectors are thorough, and their reports might scare you. But I assure you, they aren’t there to scare you, but rather to make an informed decision.

Crunch The Numbers

Whatever you do when buying a rental property, it’s imperative to do the numbers. Potential rental property investors should start a spreadsheet and get the best estimate of your costs. For example, there will be closing costs before you get the keys. Then, there might be renovations. Also, you’ll need to consider rental income minus property taxes, utilities, and estimates for ongoing maintenance. The better real estate investors know this information beforehand, the better they will know how much they can afford down the line!

Inexperienced investors ignore or underestimate many of the expenses associated with rental properties, such as vacancy rate, repairs and maintenance, property management costs, and legal and accounting fees, says G. Brian Davis, Director Of Education – SparkRental.

Buy A Rental Property With No Money Down

Seasoned investors might be happy buying a rental property by borrowing the down payment. For example, they might use a line of credit, find money from other investors (friends, family, etc.), or, more commonly, use equity from other properties in their portfolio. While I’m not necessarily an advocate of borrowing a downpayment, knowing how it works is essential.

Say you have an investment property that you bought a few years ago, and today, your realtor tells you it’s probably worth $300,000. Further, you have a mortgage of $200,000 outstanding. This means you have $100,000 of equity that you can partially use to fund the purchase of another investment property!

Find the perfect tenant

If you’re buying a rental property that already has tenants, then you’ve already got a head start on generating rental income. And you’re likely in good shape (if the tenants are decent). However, you’ll need to consider finding the perfect tenant if the property is vacant. In my experience, the perfect tenant is like finding a unicorn. When you find one, treat them like family.

Try to find tenants who will treat the home the same way you might treat your home. Indeed, you’ll likely want some sort of proof of income and maybe even assets. References can be helpful, but I generally prefer references from those who have little to gain (I.e., I don’t want to call a family member or a friend). However, a banker, doctor, or employer would be a great choice!

Screen Your Tenants

Screen your tenants as best as possible. Indeed, there will always be people looking for how to get a rental with bad credit. Elandas Miller, CEO & Founder of Kicking It Sports, says he initially learned this the hard way. Many of his tenants didn’t have the highest credit score, which usually means they are not the best at paying on time. To alleviate any hassle, do your best to screen tenants and find people who have a good credit score, a stable background, proof of income, and will take good care of your property. There are dozens of tenant screening software to help real estate investors find the right tenants. 

Tenant Placement Services

Finding a great tenant is a little bit like finding a unicorn. Indeed, model tenants are few and far between. But, when buying rental properties, real estate investors want to improve the chances of finding a great tenant. For example, you, the landlord, must do your due diligence. For finding tenants, I say, leave it to the professionals. Tenant placement services usually cost between 1/2 and 1 month’s rent. And in exchange, they will screen prospective tenants, run credit checks, check references, and finally, write the tenancy agreement.

Unless you have a (close) family member or a friend moving in, I highly recommend hiring a tenant placement service at a minimum if you’re new to buying rental properties.

Property Management

Like tenants, good property managers are worth their weight in diamonds. A good property manager will not only screen prospective tenants but will collect the rent and handle the day-to-day maintenance and issues that will come up. Also, property managers act as the emergency contact for landlords if something happens. For example, if the basement floods at 2 am, it’s the property manager’s issue. But, don’t forget, you, the investor, will pay for it.

It’s inevitable that life changes in ways we don’t expect it to, says Shawn Breyer, Owner – Dough Hackers. Make sure that the area where you buy rental property has at least five property management companies. If you move away and cannot manage the property yourself, you don’t want to be stuck with a terrible property management company.

Avoid The Bad Apples

A bad property manager can make real estate investors lose tens of thousands of dollars of rental income annually. And if your property management company turns out bad, later on, you want to be able to easily switch to a better one. 

Like all good professionals, property managers aren’t cheap. Indeed, they generally cost 8-12% of the gross rent. To be sure, this could mean the difference between profit and loss in any given month. So, when buying a rental property, give it some careful consideration!

Ask Questions When Buying A Rental Property

Knowing things like the HOA (Home Owners Association) fees will be necessary if you buy a rental property such as a condo. Indeed, a condo with very low, or similarly, very high HOA fees can be a red flag. Also, try and get a copy of the documents related to the property’s history. To be sure, most HOA will provide the “minutes” to the previous meetings. READ THEM!

On the other hand, if you’re buying a detached house, you’ll want a closer look. For example, have there been renovations made, and was a permit used? Renovations must be done the correct way, following all the local laws. Otherwise, you might find yourself in a bind later on.

I have delayed purchases, walked away from opportunities after due diligence over price, inspection issues, disclosures, and pending assessments at Condo associations. There are many reasons to proceed with caution and to walk away. 

Tom Mercaldo, President – Aquinas Consulting

How To Buy A Rental Property FAQs

Is owning a rental property worth it?

One of the most significant wealth-builders real estate investors will ever encounter is owning a rental property. But, like every investment, you have to do your research.

Can I buy a rental property without owning a home?

Buying an investment property without owning a home can be risky if you’ve never owned a home before, as you might not be aware of all the things that could happen. Perhaps consider buying a duplex, triplex, or even a fourplex instead. Owning a rental and living in it will always be nearby should you need to be available.

How much should a rental property cost?

When buying a rental property, real estate investors must have a solid idea of your affordability. For example, how much do you have for a down payment? And how much rental income will you have? A mortgage broker or banker will undoubtedly help out to determine your affordability.

Is it better to buy a rental property first?

It’s always better to buy a home you will live in first. However, if you buy a rental property, consider a multi-family home such as a duplex, triplex, or fourplex. If you own a rental property and live in one unit, the other tenants can live in the other units.

Is it harder to get a loan for a rental property?

Yes, obtaining a mortgage on a rental property is generally more challenging. However, if you are organized, it is certainly possible! One thing I’ve learned about buying a rental property is that the more I did it, the easier it got!

Can you get a 30-year mortgage on a rental property?

Yes, real estate investors can get a 30-year mortgage on a rental property. However, each lender will have its requirements. When buying a rental property, it’s suggested to borrow as much as you can, for as long as you can, for the cheapest amount possible. Indeed, that will give you the most flexibility!

Can I live in a rental property?

Yes, you can certainly live in a multifamily rental property while collecting rental income from the other units – and I highly recommend it!

When is the best time to buy a rental property?

Buy earlier and as soon as you can. I lived in my first investment property, a multifamily home, while I fixed it up. When the tenant’s stove and refrigerator broke, I gave them mine and lived with a cooler and microwave for nine months until I could replace mine. I had fun with it and never regretted diving in. I only wish I had gotten started earlier.
Attorney Michael Robbins – Crowley & Cummings

Final Thoughts

Buying a rental property to generate rental income is no easy task. In general, finding an investible property requires planning and patience. I hope these tips have been helpful. Should I have missed something about buying a rental property, don’t hesitate to reach out first and let me know. And, if you found this helpful article, let me know in the comments below!

This article How To Buy A Rental Property – 23 Tips Revealed originally appeared on Rick Orford – Invest, Earn More Income & Save Money.