Are you considering buying a rental property? This can be a great investment when done right, but it takes a lot of time, planning and patience. Even though you won’t be living in this home, you’ll be renting it out to people who will. You need to go through the full process of buying the property and ensuring it’s fit to live in for tenants.
The experience of buying a rental property is different from buying a home for yourself. This means it comes with a unique set of items to consider and remember. Here are some tips to get you on the right track to successfully owning a rental property!
You’ll have landlord responsibilities
Owning a rental property means becoming a landlord, and that comes with some big responsibilities. You have to be prepared to be the tenants’ contact when they have issues within the unit, and you’re on the hook for most minor repairs and replacements. Since you own the property, it’s your job to organize any services the unit might need (think plumbers, electricians, locksmiths, etc). These duties can take a good chunk of your time and you can’t put them off when they’re needed.
As a landlord, it’s also important to have a very clear lease agreement when you find tenants. This will help make your relationship as smooth as possible. Be sure to include a lease start and end date, as well as payment expectations for utilities and rent, everyday responsibilities for garbage and snow removal, and whether you require rental insurance. It’s essential to screen potential tenants too, to be sure they’ll be a good fit for your property. Unreasonably late rent payments, trashed units, and loud noises equal a disastrous experience.
Take your finances into account
You might not be buying a rental property for yourself, but you’re still buying a new home. With that in mind, make sure you budget accordingly so you know what you can afford. Your expenses will vary depending on whether you want to buy a single unit within a building, a house, or rent out your own basement. Extra expenses like closing costs, property taxes, and insurance also add up. As the buyer, all of these costs fall on you. Even if you plan to build home equity with a property that appreciates in value, you’ll have to handle these debts first.
Prepare for a trickier mortgage experience
Buying a rental property is a more complicated process than buying your first home. When you want to add another property on top of your existing one, lenders often need more assurance that you can handle these additional payments. This is especially true if you haven’t fully paid off the mortgage on your current home yet. It will take some extra work on your part to prove your ability to manage a second property.
Unfortunately, you also can’t rely too heavily on tenants’ rent to make the necessary payments on your rental property. Lenders need to know that in the event your unit isn’t rented out all the time, you can still come up with the money to make payments on time. Having a great credit history is essential here. You can read more about building the credit score you need to get a mortgage here.
Buy in a familiar area
If you want to be sure of your rental property’s value and safety level, it’s good to stick with what you know in terms of location. Buying in an area you already know gives you knowledge of the area for tenants and the ins and outs of the region. You can appeal to renters if you have first-hand experience with the area and can answer any questions. Even better is if you choose an area near amenities like malls and grocery stores. These features will help the property appreciate in value, as people want to be near the essentials and be able to get there without necessarily needing a car.
None of this means you need to buy a rental property on the same street as your own home! It’s just a benefit if you can have confidence in your own knowledge of the area.
Go for a move-in ready property
Anyone who buys a home has to decide whether they want to go for a fixer-upper or a move-in ready property. Deciding between these options is difficult enough when it’s a home for yourself, but what’s best for buying a rental property?
In general, it’s safest to go with a solid move-in ready home. While fixer-uppers are cheaper to buy, the improvements you need to make them liveable will cost you a ton of money, without the payoff of you being the one to enjoy them. That’s not to say tenants don’t deserve a nice living space! They do, but buying a move-in ready property that was renovated ten years ago is better than buying a cheap home now and paying tons to restore it to 2021 standards.
Consult a broker
Even if you already own a home, buying a rental property is a much different experience. It’s important to use a mortgage broker to help you navigate the process! Brokers help you with your down payment, finances and understanding your buying power. They can make sure this is a successful investment for you and that the process goes as smoothly as possible.
If you have questions about buying a rental property, get in touch with me here!