Millions of people live as renters in single-family homes across the nation. And over the next couple of decades, the segment of renters could explode in size.
While headlines about today’s real estate market are mostly about increasing home prices, it’s important to not overlook other market trends that can open the doors to possibilities.
The strong market outlook for rental properties is reason enough to stop and think to yourself: Can I be a real estate investor?
If you’ve thought about it before, you probably have a lot of questions about the feasibility of buying a rental home and what the next steps look like. As you know, owning a rental property is an exciting way to earn passive income, but the work that goes into managing a property could be very hands on.
To get a clear look at how involved the process is, check out some of the big steps you will take once you decide to move forward as a real estate investor.
Determine profitability
How profitable will the property be? That’s a central question to figure out as you make this weighty decision.
Figuring out value is easy. You will just need to know the expected annual rental income and costs associated with homeownership, such as taxes, home repairs and management fees. Investors can forecast cash flow by subtracting costs from rental income.
Upfront cash is another consideration. Investors need to account for the costs of buying a home and making necessary home repairs. These upfront costs will be used to calculate the return on investment.
Draw up a financial plan
Buying an investment property differs from buying a home for a primary residence. So, you’ll need to plan accordingly. As an investor, you can expect to pay a bigger down payment, for example. Other more stringent lender requirements may ask borrowers to have a credit score of at least 720. This requirement varies so it’s possible to purchase a rental property with a lower score.
You will be familiar with the type of required documents. They include tax returns, bank statements, proof of income and other financial details. Depending on their income, applicants will need to set aside up to six months of mortgage payments as a condition of getting loan approval.
It’s a tall order, but investors have the tools to succeed once their plan is in place.
Conventional lending options that are backed by Fannie Mac or Freddie Mac are available. You can also form a joint venture or work with a private lender to get you across the finish line.
Choose rental property
Of course, location is always a top consideration in real estate.
As you begin to narrow down your target homes, there will be a lot to think about. Is the area blossoming and thriving? Is there room for growth? It’s important to feel confident about the area’s trajectory.
Dig into the numbers. You want to take a close look at the percentage of renter-occupied households, rent prices, vacancy rates, property tax rates, historic changes to home prices and overall safety and livability ratings within your targeted neighborhood.
To minimize risk, you might consider purchasing a home that’s rent-ready. With a tenant in place, you can save on time and money.
Track every dollar
It’s common for first-time real estate investors to feel the pressure when tracking income and expenses. Some common line items include rental income, deposit, leasing fees, property management fees, repairs, pest control, insurance, mortgage payments, owner expense and related income and expenses.
With so much to cover, it can feel overwhelming.
Specialized software, though, will help you accurately and efficiently track income and expenses. You’ll be thankful for all the work you put into setting up proper tracking of your rental property income. Once you have a system in place, you can run reports and produce income statements, capital expenses and other pertinent financial statements.
There are various loan programs available to help with purchasing a rental property. For more information, contact us today!