According to a 2017 study from the Pew Research Center, 36.6% of all households in the US live in a rental property. Among those, 65% of people under the age of 35 rent rather than own.
For property investors, that’s great news!
Property can be a great investment. And with so many people deciding to rent rather than own, it’s no wonder that landlords are excited to be in the business of collecting rent.
Are you on the hunt for your next apartment building or multi-family home? Here are five great tips you need to know for acquiring your next rental property.
1. Get Your Finances in Order
Whether you plan to buy a tiny trailer or a 200-unit building, there’s no point looking at properties until you know how much money you can afford to spend.
Dive deep into your finances. Figure out how much you can spend and create a budget. No matter how enticing a property may seem, stick to your budget! Never bite off more than you can chew.
Research rent prices in the neighborhood. That way, you’ll be able to estimate how much income you’ll earn (that income will factor into how much you can afford to borrow).
Just don’t cut it too close. You should also set aside a portion of your budget for maintenance and repairs.
Before you start looking at properties, get pre-approved for a loan. If you find a property you like, you’ll want to act quickly, and a pre-approval makes that easier to do.
2. Know the Laws
Every state has landlord/tenant laws, and you need to know those laws before investing in a rental property.
If this is your first property, you’ll have to ask yourself one question:
Am I ready to become a landlord?
Knowing the laws is the best way to decide if you’re ready.
Remember that as a landlord, you’re responsible for providing your tenants with a nice place to live. If you’re not willing to do the day-to-day work, you may want to hire a property manager to handle the details for you.
Decide this in advance so you can factor a property manager’s salary into your budget.
3. Research the Neighborhood
There’s no one-size-fits-all rule to buying real estate. Every city — actually, every neighborhood — is different.
While it may be tempting to look for property out of state where homes are less expensive, it’s always best to buy in an area that you know well. Avoid buying in an area that you’re unfamiliar with.
Focus your sights on neighborhoods where property values are likely to appreciate. Invest in an area that’s either stable or on an upswing. Avoid neighborhoods where home values have been steadily depreciating over the years.
Stick to neighborhoods in desirable areas. People like options, so look for buildings that are close to restaurants, shops, and recreational areas.
Buy in a neighborhood that’s near public transportation, too, so your tenants have a convenient way to get to where their jobs are.
It can be tempting to want to buy a fixer-upper to save yourself some money upfront. However, it’s easier to buy a property that’s ready (or almost ready) to rent. The more time you have to spend doing major repairs, the longer it will be before you can start collecting rent.
4. Have a Property Inspection
Once you’ve found a home or building that you want to buy, schedule an official property inspection. You can make your offer right away, but make it contingent on the results of that inspection.
You don’t want any big surprises. Heating systems, roofs, ductwork, and windows can all be costly repairs. Unless you have money set aside for improvements, it’s important to make sure that the property’s most expensive features are in good shape.
It’s unethical, and against the law, to rent an unsafe unit. If the conditions aren’t livable, you won’t be able to rent to anyone. And that means you’ll be on the hook for paying the loan back on your own until you can make the proper repairs and legally start collecting rent.
5. Learn About the Tenants You Might Inherit
If you’re looking to buy a turnkey property, there’s a good chance that you might inherit a few tenants who are already there and locked into a lease. Until that lease is up, they’ll be your tenants, like it or not.
This can make a huge difference in whether you decide to buy a property. Think about how much they’re paying in rent. Think about if their occupancy will affect any repairs or remodeling you want to do.
If your city has rent stabilization laws, think about how that will affect your bottom line.
In an ideal situation, the current tenants will be exactly like the type of tenants you would choose yourself. But that’s not always the case.
Meet them and decide if they are people you can trust. You’ll need to determine if you’re comfortable renting to tenants that you didn’t screen yourself.
Inheriting tenants can be a good thing (instant rent!). But if those are going to hinder your plans for the property, it could be a huge negative.
If you’re ready to buy a new rental property, here’s what you need to do:
- Get your finances in order, set a budget, and get pre-approved for a loan
- Know the landlord/tenant laws in your state and understand your obligations
- Research the neighborhood and local rent prices
- Hire a professional to do a thorough property inspection
- Learn about any tenants you might inherit from the previous owner
A rental property can be a great investment, but you have to go about it the right way. Do your research and keep these tips in mind, and you’ll be well on your way to becoming the real estate mogul you want to be!
Aaron Hunt is the Property Manager for Prime Place UNL, a luxury apartment community near the University of Nebraska—Lincoln.