How do you know when you are ready to buy your first rental property?
My own experience as a landlord began unexpectedly, when I got married and my spouse and I found ourselves with two homes. Turning one into a rental meant learning everything from setting the rent and marketing the property to collecting payments and managing day-to-day responsibilities.
A few years later, we approached another rental property purchase much differently. Before buying a multifamily property and living in one unit while renting the other two, we researched the rental market, estimated potential rental income, and considered how the property would fit into our finances.
The experiences taught me an important lesson: Owning a rental and being prepared to invest in one are two different things. Before buying your first rental property, consider whether your finances, expectations, and plans for managing the property put you in a position to take that next step.
How Do You Know When You Are Ready to Become a Landlord?
There is no single right time to become a landlord. If owning a rental property is one of your goals, you can start preparing by evaluating your finances, researching the rental market, and determining what you want from the investment. Taking these steps can put you in a better position to evaluate opportunities when the right property comes along.
Several items need to be put in place before you purchase:
- Financing
- Choosing a market
- Picking a property
- Preparing the property
- Managing the property
Becoming a landlord is a business decision and shouldn't be made haphazardly, so make sure you have a comprehensive plan in place before taking the next step.
Financing
Financing an investment property is not identical to financing your own personal residence. Down payment requirements for a rental property can vary based on the type of property, loan program, lender requirements, and whether you plan to live in the property. For example, financing requirements may differ for a single-family investment property, a non-owner-occupied multifamily property, and a multifamily property in which you plan to occupy one of the units.
Research the rental market
Before purchasing a rental property, research the local market and review what comparable properties are renting for. Then, compare the property's potential rental income with expected costs, such as the mortgage payment, property taxes, insurance, maintenance, repairs, and potential vacancies. Looking at both sides of the equation can help you determine whether a property makes financial sense for your goals.
Choose a property
Look at factors such as the purchase price, expected rental income, property taxes, insurance costs, condition of the property, potential maintenance needs, and local rental demand. Consider how each property fits your budget and investment goals rather than relying on a particular appreciation rate or projected return.
Preparing the property
Determine whether the property needs to be refreshed or renovated. Sometimes, fresh paint and squeaky clean appliances make a big difference for a minimal amount of money.
The rental should be move-in ready. Consider the condition of major systems and components, including the plumbing, electrical system, HVAC system, and roof. A property that requires extensive repairs or renovations may involve additional upfront costs and could take longer to prepare for tenants. Factor the potential cost and timeline of necessary work into your evaluation before purchasing the property.
Consider how you will manage the property
Before buying your first rental, consider how you will handle the day-to-day responsibilities of being a landlord. In addition to finding tenants, you will need processes for tasks such as creating lease agreements, collecting rent, responding to maintenance requests, keeping records, and communicating with tenants.
You will also need to understand the landlord-tenant laws that apply where your property is located. Requirements can vary by state and locality and may govern areas such as security deposits, notices, property access, disclosures, and other aspects of the landlord-tenant relationship.
Prepare Before You Purchase
Buying your first rental property is a significant financial decision, and preparation can help you determine whether you are ready to take that step. Research the rental market, understand the costs and responsibilities of owning a rental, evaluate your finances, and establish your goals before making a purchase. The more you understand about the investment and what managing a rental involves, the better prepared you can be to decide whether the time is right for you.
Once you're ready to list the rental, Apartments.com free Rental Tools can help you manage many landlord responsibilities in one place. Create an online lease, collect rent, manage maintenance requests, communicate with tenants, and keep important rental information organized online. Setting up a free account is all it takes to get started.
Originally written on July 25, 2019, and has been updated.
