Rental properties are an attractive option for many investors. If you are new at buying rental property, there are many considerations you should keep in mind. Before you take the plunge, read this guide to investing in rental property for beginners.
Decide If You Want to Be a Landlord
When you buy a rental property, you become the landlord of the property. You can hire a property manager for these tasks, but they typically charge between 8 and 12 percent of collected rent. If you are a novice rental property investor, you will likely have to deal with the following issues yourself:
- Screening prospective tenants
- Doing your own repairs on the property
- Hiring contractors for repairs and maintenance
Research Property Location
Location is key when it comes to investing in rental property. Look for mid-range properties in an economically healthy neighborhood. Do a market analysis to find out the following:
- Landlord-tenant laws
- Rental population
- Rental rates
- Price to rent ratio
- Property taxes
- Crime rate
- Quality school district
- Job market growth
Get in Shape Financially
Before you start shopping for rental properties, you’ll want to be in the best possible financial shape. Lenders have stricter standards for rental property mortgages than for traditional mortgages. Here are some typical requirements for a successful rental property mortgage application:
- Credit score at least 620, but ideally above 740 for the best terms and rates.
- Debt between 36 and 43 percent of income (debt-to-income ratio)
- Ability to pay a 20 percent downpayment
- Savings to cover three to six months of mortgage payments.
Income vs Expenses
During your first year as a rental property owner, a 6 percent return on investment (ROI) is a reasonable goal, with the expectation that it will increase over time. The rent you charge must cover operating expenses, which can total 50 percent of the rental income you collect. Expenses can include
- Maintenance and repairs
- Homeowners association fees
- Homeowners insurance
- Property taxes
On the other hand, rental property owners often qualify for tax breaks on mortgage interest, maintenance and other expenses. Rental properties also often increase in value over time, so you may be able to recoup expenses if you sell the property..
Advantages of Buying Investment Properties
Although there are exceptions, real estate values are generally more stable than other investments such as the stock market.
- Rental property is a source of passive income, especially if you hire a property manager.
- As you collect rent income, you can devote time and energy to your full-time job.
- You don’t have to pay Social Security taxes on rental income.
Disadvantages of Buying Investment Properties
Rental property investment is not for everyone. Here are some potential drawbacks to consider:
- Interest rates are usually higher for rental property mortgages than for a traditional mortgage.
- As stated above, rental property mortgages are more difficult to obtain than traditional mortgages.
- Dealing with tenants can be a hassle if you don’t hire a property manager.
If you’re a Boston-area rental property owner, RH Blanchard can help with your general contracting needs. Contact us today for a free consultation.