If you are ready to start building your real estate empire, it’s probable you are now looking to purchase your first rental property. While it is an exciting time, it is also important you think about various details that will go along with your purchase. To make sure all goes well and you know exactly how you wish to proceed, here are four important things you should always know before buying your first rental property.
When you bought the house where you currently live, you may have only needed a three percent down payment to finalize the purchase. However, when buying rental property, expect to need a down payment of 20 percent. As for why you’ll need so much more, it is because mortgage insurance is not available on rental property purchases. Therefore, make sure you have secured your loan from a bank or other source before moving ahead with your purchase.
While owning rental property sounds great, it can quickly become very time-consuming if you choose to handle everything yourself. Because of this, always ask yourself if you are indeed landlord material. While you could be the one responsible for fixing a toilet or collecting the rent, you could also turn over these and other responsibilities to a property management firm, giving you more time to pursue other properties or have some fun.
While you may be tempted to buy that fixer-upper that is being offered at a very low price, resist the temptation to make the deal. Unless you are extremely talented at making home improvements on your own, the fixer-upper you bought as rental property will become a drain on your finances very quickly. Rather than face this nightmare, pick a rental property that is already in great shape.
Last but not least, always carefully calculate your operating expenses before you ever sign on the dotted line for your first rental property. In most situations, your operating expenses will be between 40-80 percent of your gross operating income. For many rental property owners, it is usually about a 50-50 split. Thus, if you are charging a tenant $2,000 rent per month, expect your monthly operating expenses to be around $1,000.
Once you take care of the details and know what you should and should not do before buying your first rental property, building your real estate empire can become a fun and profitable adventure.