5 Things You Should Know Before Investing In Rental Properties
Updated June 24, 2020
By Kristina Marshall
A new home is the biggest purchase you're likely to make. According to the U.S. Census, the price of homes on the market in the U.S. averages more than $299,400. That price varies drastically depending on the part of the country where you're house hunting. People who've been through the process of buying a home, whether for personal use or as an investment property, always have a list of things they wish they'd done differently.
Here are five things you should know before investing in rental properties.
1. Get your Finances in Order
The first is making sure you have your finances in order. Before you hit the open houses or the online listings, take the time to pay down active debt and have that down payment ready.
Experts recommend taking the time to get pre-approved by a lender. This does two things. Pre-approval will ensure you can make an offer when you find the house you want to purchase. Also, taking the time to get pre-approved allows you to shop for different lenders to see who will best fit your needs.
Waiting to secure a lender until you need to make an offer can leave you with a less desirable financial arrangement. It could mean you miss out on the house you wanted by not finding a lender in time.
2. Think Logically Not Emotionally
Second, leave your emotions at home, whether you're shopping for your own house or investment property. Falling in love with your dream home can land you in a situation where you go over budget. Letting emotion rule your purchase may blind you to the potential of a home.
The property may need a few decorating or renovation tweaks to turn it into the right investment. If you're planning on flipping a house, take care that you have the skills or the money for the reality of dealing with a fixer-upper. It's supposed to be an investment, not a money pit.
3. Have a Solid Down Payment
Third, you want to have your down payment in the bank. While lenders might be more lenient with smaller down payments on a home you plan to live in, that's not the case with investment property.
Lenders won't give you much wiggle room from the traditional twenty percent down payment. As a rule, mortgage insurance is not available for investment properties. So, if you have the down payment you will need, you're ready to buy.
However, the down payment is just at the beginning of the cash you may need to have on hand to finalize your purchase. Expect closing costs to tack another two to five percent onto the purchase price. Closing costs can become part of your sales negotiation. If the seller is motivated, it's possible to have them foot the bill.
You might need to spend money on inspections too. Experts say putting the cash into inspections is well worth the investment. The issues that arise can be used to help in your negotiations. They may also reveal problems that require walking away from a deal even after the seller accepts your offer.
Stay within your budget. It's tempting to look at homes at the upper end of your budget. However, when you do, that leaves little room for add-ons that might bump the price. Experts suggest checking out what's at the low end of what you're looking to buy, particularly if you're in the market for investment homes.
It leaves more room to move up, but it also allows some wiggle room for a home that might need renovations for you to make it a decent rental prospect. It's important to remember, especially with older homes, that other costs will factor in repairs (savings account to cover these is an excellent idea). You might also look into having a home warranty. These include appliances and systems, such as heating and cooling. Planning for those types of emergencies can keep you from having to shell out a large amount of cash if several repairs pop up at one time.
An excellent tool to determine what you will be able to receive in rent on either high-end or middle or a low-end property is rentometer.com. Rentometer allows you to enter any address and view the current rental listings nearby, see what high, middle, and low rent amounts look like and help you figure out your purchase price based on cash flow.
5. Ask Questions
Finally, don't be afraid to ask your lender, your realtor, other investors, and the seller. Buying a house is a significant investment. In the end, though, you need to go with your gut. If something doesn't feel right, it might be better to walk away.
When it comes to investing in a home, be prepared that whatever can go wrong probably will. Planning and listening to people who have experience buying and selling can prepare you for whatever pitfalls come your way.
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