How to Buy Rental Property: 7 Tips for First-Time Investors

Considering buying a rental property? Smart decision! Investing in real estate is a great way to build another income stream and diversify your finances.

The only problem? You have no idea where to start. There are so many properties available and so much conflicting advice on how to buy a rental property. It’s easy to get overwhelmed.

The good news is buying a rental property doesn’t have to be complicated. That’s why we’ve put together this post with the top tips to simplify buying a rental property for first-time investors. Let’s get started with the first, and most important, tip — whether you want to be a landlord.

Tip 1: Make sure you want to be a landlord

Owning a rental property can provide additional income. However, being a landlord can be time-consuming, expensive, and stressful if you don't know what you're doing.

Finding, screening, and managing tenants can take time. Then once you find tenants, you'll have to respond to any issues or concerns they have (like a broken toilet or noisy neighbor), which could be a significant time commitment if you don't have a property manager.

Owning a rental property additionally comes with some stress and uncertainty. There may be times when your property sits vacant. Other times, a rowdy tenant might cause damage that needs your attention immediately.

If you're already stretched thin in both time and money, being a landlord might not be the right choice at this point in your life. However, if you have determination and grit, owning a rental property can be a great option.

Tip 2: Choose an experienced team

Especially when buying your first rental property, you need a great team to help. Your team should include professionals like a real estate agent, real estate attorney, home inspector, appraiser, property manager, contractor, and more.

Your real estate agent is a helpful resource for finding top-notch professionals. However, it’s important to choose a real estate agent well-versed in investment properties. That’s because buying an investment property is a different process than buying a primary home. A good real estate agent and investment team are key to being a successful investor.

Tip 3: Get your finances in order

This may seem obvious, but you'll need to be in good financial standing to buy a property. If you have a lot of debt or other monetary commitments, it can be hard to find extra money to buy and manage your property.

If you’re planning to buy your rental property with a loan, it’s also important to save up for a down payment. A 20% down payment means you don’t have to pay mortgage insurance, saving you a nice chunk of money. Having a sizable down payment also means you'll have a lower monthly mortgage payment.

After saving your down payment, you should look for a mortgage. Loans for investment properties are considered riskier by lenders. So, you have to meet higher requirements to qualify – like a good credit score, debt to income ratio, and personal savings. Once you meet the requirements, you can shop around for a mortgage with the most favorable terms (like a lower interest rate).

Financing your property isn’t the only option. You can also pay for your property in cash. This option can cut your expenses and make it easier to deal with vacancies (because you have no mortgage payment). It can take a while to save up to buy a rental property in cash so this may not be feasible for everyone.

Whatever method you choose to buy your rental property, you'll need to do some research before beginning the buying process.

Tip 4: Find the right location

After getting your finances together, it’s time to start thinking about where you want to buy a rental property. Choosing the right location can increase your profit, make it easier to find tenants, and minimize damage to your property. The wrong location can doom your investment from the start.

First, determine what general area you’re interested in. Do you want to buy a local rental property? Or do you want to buy a property in another city? Consider market trends – like whether the area is growing or shrinking in value. You should also consider whether the location has desirable amenities, such as good schools, close shopping, and outdoor activities.

You can also look at rentals in the area to see how much they’re charging for rent. This can give you an idea of how much your rental could make compared with the purchase price. If purchase prices are high and rental rates are low, you should probably avoid the area.

Tip 5: Decide on a property type

Along with location, you should also determine what property type you’re looking for. Do you want a single family or multifamily property? Do you want a free-standing house, duplex, condo, townhouse, or some other property type?

As a first-time landlord, you might want to choose a smaller property type. Instead of buying a 10 unit multifamily property, you likely want to start with only a few units. A single family house or a duplex/triplex are great starter options.

Tip 6: Evaluate individual properties for profitability

Once you know where and what you’re looking for, it’s time to find your rental property. You should evaluate each property that is a serious contender for profitability. Otherwise, you could be stuck with a money pit of a rental property.

To determine profitability, you first need to know what you could charge for rent. Then you need to subtract expenses from your expected rent. Your mortgage, taxes, and insurance are one category of expenses to consider. You also need to take into account reoccurring costs – like pest control, landscaping, or a property manager. For unknown expenses (like maintenance or vacancies), you can expect to pay roughly 15% of your rental income.

After subtracting these expenses, you should turn a profit. If the expenses are more than expected rental revenue, you shouldn’t buy the property. If you have positive cash flow after this calculation, the property could be a good choice.

Tip 7: Invest in landlord insurance

After you buy a property, you need to make sure it’s protected.

You put in all this work to find a great investment, so why leave it vulnerable to unexpected disasters? All it takes is one event, like a fire, hailstorm, or frozen pipes, to damage your property and make it unlivable. Without landlord insurance, you’ll have to pay for these expenses out of pocket – which can be thousands of dollars.

Instead of risking being on the hook for costly repairs, you should get landlord insurance. The right landlord insurance can protect your property from common perils (like natural disasters). It can also protect you from liability for tenant injuries.

Get a Quote

Landlord insurance is essential for any first-time investor. However, it’s important to choose the right policy. At Obie, we can help you find the insurance you need. Our modern approach is fast, simple, and completely online. You can request a quote in minutes.

Get your quote today to start protecting your rental property.