Your first property will take a lot of your time as you learn the ins and outs.
Think of it as another part-time job. Here are some things to consider:
- Pay Down Debt First
If you have student loans, unpaid medical bills or your triplets will soon attend college, purchasing a rental property may not be the right move
- Got the Down Payment?
Investment properties generally require a larger down payment than an owner- occupied building and have more stringent approval requirements. How much will you need? At least 20%, given that mortgage insurance isn’t available on rental properties.
- Beware of Higher Interest Rates
The cost of borrowing money might be cheap right now, but the interest rate on an investment property will be higher. Remember, you need a mortgage payment that’s low enough so that it won’t eat too heavily into your monthly profits.
- Calculate Your Margins
Individuals should set a goal of 10%. Estimate maintenance costs at 1% of the property value annually. There’s also insurance, HOA fees (if applicable), property taxes and monthly expenses such as pest control and landscaping.
- Don’t Buy a Fixer-Upper
It’s tempting to look for the house that you can get at a bargain and flip it into a rental, but if this is your first property, that’s probably a bad idea. Instead, look to buy a home that is priced below the market that needs mostly minor repairs.
- Calculate Operating Expenses...
Overall, operating expenses on your new property will be between 35% and 80% of your gross operating income. For an even easier calculation, use the use the 50% rule. If the rent you charge is $2,000 per month, expect to pay $1,000 in total expenses.
- “Cash on Cash”
For every dollar you invest, what is your return on that dollar? If you can get 6% in your first year, that’s probably a win since that number should rise over time.
- Get a Low-Cost Home
The more expensive the home, the higher your ongoing expenses will be. Some experts recommend starting with a $150,000 home.
- Find the Right Location
Look for low property taxes, a decent school district, a neighborhood with a low crime rates, an area with a growing job market and plenty of amenities, such as parks, malls, restaurants and movie theaters.
- The Bottom Line
Like any investment, a rental property isn’t going to produce a large monthly paycheck for a while and picking the wrong property could be a catastrophic mistake. Consider working with an experienced partner on your first property or rent out your own home to get your feet wet.
Please contact one of us:
Charlie Leonard, Licensed Real Estate Broker (305) 726-8416 or Sean Pascale, Realtor (786) 205-0187 at Leonard Real Estate Group we'll help you find the investment property that's right for you.
