Purchase your first Rental Property
In this article, I have listed some of the basic things to be considered before deciding to purchase your first rental property. The prerequisite might be an obvious one, but before you even start with the first step, you will need to ensure you have enough money for a down payment. In addition, unless you will be buying a house in cash, you will need a good credit score to be able to get a loan.
- Good credit score
Ideally, you want to have a credit score of about 740 to be able to receive the best rate of interest on your mortgage. If your score is below 740, then you are considered a risk, thus this risk is mitigated by lenders by charging you a higher interest rate on your loan. If you need guidance on how to build up your credit score, there are many articles right here on Medium to guide you.
2. Determine your price range before looking at properties
Price range should be determined based on how much loan you will be qualified for and how much down payment you have. Income, as shown in previous two years tax returns, current savings, current debt, and credit score are some of the factors considered by lenders when determining the mortgage loan amount. It is important to know these numbers before you start looking at properties as it would be heartbreaking to find a house you love only to find out you can’t afford it. Another aspect to keep in mind is avoiding having lenders run your credit score each time you want an estimation of your loan. You should take out your credit score once and provide that to each lender you decide to reach out to as running your credit score many times hurts your credit score.
3. Be prepared with you documentation
When you speak to a lender, get a list of documentation you will need for applying for a loan. When you find a good property that you love and want to purchase, you can bet that there are 20 more people who are also interested. Having your documentation ready helps you stay ahead of the curve. This will ensure you can act on a timely manner when you are sure about a property.
4. Looking at properties
This will be a lengthy process. You want to ensure that you look at ALL properties in your price range within your area. It is important to expand your price range about 10–15% on the lower and higher end to ensure you don’t miss out on looking at a property just because it is slightly out of your price range. You want to look at as many properties as you can. This will give you the overall idea of what is available in the market and what is considered a good price. After a complete inspection of ou will recognize right away when you see a property that is of good value. It is possible to miss out on an extremely good deal, but you are not able to recognize it as a result of lack of knowledge that can only be gained from looking at these houses.
5. Types of properties
There are several types of properties appropriate for a first time rental property buyer: single-family homes, Condominiums, and multi-family homes. The downside to buy condominium as a rental properties is homeowners associations eating into some of the profits. On the other hand, condominiums can be low maintenance as outside repairs are handled by the homeowners associations. Depending on how involved you want to be with your rental property, homeowners associations can be a pro or a con. Single family homes and multi-family homes are better options for profit margins. Single family homes attract long-term tenants. These are people with families that are more likely to have stable income and ability to regularly pay rent on time. If you don’t already own a home, it might make sense to buy a duplex so you have a place to live and rent out the second unit.
These are just some of the things you need to get started with. Another article to follow containing the specifics of what you should consider when looking for a rental property. Some of the specifics covered by the next article will be calculating cash flow, mortgage payment, appropriate profit margin, fixer uppers, etc.
