Ready To Invest In Rental Property? Here’s What You Need To Know Before Getting Started
If hours of binge-watching HGTV makes you wish that you could dive into real estate investing, you aren’t alone. But, there are a few things you should know before you decide to make your first investment. When it comes to beginning a rental property portfolio, be sure to explore all options, consult with experts, and build a business plan. This article explores the route of buying a first home as an investment and building a real estate investment portfolio from there.
Buying A First Home for A Future Rental Property
You don’t have to go straight into being a landlord. Buy your own house first. Even though you live in the house, you are still investing in your future. You own real estate so you are a real estate investor! When buying a first home, there are a plethora of financing options. Some options allow for a buyer to purchase with no money down: VA loans or USDA Rural Development home loans. VA or USDA loans offer an easy path to owning that first home because of the affordable payments. If a buyer has down payment, it may help future cash flow in a rental situation. The lower the payment, the better the chances are of covering the payment with rental income.
Buying a first home also brings other advantages. Number one, is it is all yours! You can do what you want within reason. Also, homeowners may gain income tax benefits that renters may not. Plus, you are investing in yourself and not helping a landlord get rich. Once a first time buyer feels ready to own their next property, the house could be converted into a rental property. Even Veterans could use a VA loan again for buying another primary!
Nothing, of course, is a guarantee as values may go up or depreciate. So foremost, make sure that you are happy with the home and that you can afford the home.
Buying A Fixer Upper
First of all, buying a fixer upper does not guarantee tons of equity right away. There are always risks associated with buying a home in need of work. You can watch any of the HGTV shows to quickly see that once something is removed, there may be a big unforeseen problem. This is why getting a home inspection is so very important. Additionally, if the home does not meet the mortgage or appraiser’s requirements, a rehab mortgage may be necessary.
Are you a handyman? If a buyer has the knowledge and time to remodel a home, this could save a lot of money, but be warned that many think it can be done and quickly discover it’s best to leave it to a professional. Whether the project got too big, or the owner just doesn’t have the time, many factors can lead to project completion complications. Be sure to account for costs either way.
Access to a contractor or handyman. If you are not able to fix all problems or renovations, use a contractor. Ask around for knowledgeable contractors that charge reasonable rates. There will be repairs that come up, so having a handyman available is important to keep your investment in good condition. Plus, it will keep your tenants happy.
Choosing The Right Realtor
Understanding how to get into real estate means asking questions and consulting experts. Here are a few important questions to ask your realtor before getting started:
What is the market rent? Even though you may purchase the home as a primary residence, ask about the market rent. Considering the rental market for the home is crucial. If you decide to switch your home to a rental property, you will be able to know and plan up-front.
What is the trend of the area/neighborhood? Does the neighborhood look to be on the way up or down? Are there projects coming up that could help or hurt the value and ability to rent?
School districts? Consider the strength of schools in the area for your children and future tenants. A strong school district will attract families with children. Those areas may be more stable or appreciating.
What are renters looking for? Knowing the amenities tenants want is paramount. The number of bedrooms, proximity to stores and schools, 1 or 2 stories, and yard size should be considered. Some areas draw renters that want low maintenance too. It could make sense to even offer a lawn service for tenants.
Buying A Multi-Family Dwelling As Investment
How to get into real estate investing right away is to buy a multifamily dwelling. These 2 – 4 unit homes allow a buyer to live in one unit and rent out the others. 2 unit buildings are called a duplex, 3 unit buildings are a triplex, and 4 is a quadruplex. Even though there would be rental income, lenders will treat it as a primary residence in this case. So favorable financing along with the ability to receive rent are very appealing!
What if the rent from the rental units could cover the mortgage payment? That would be a win-win. Then you could build wealth even quicker by the tenants paying your mortgage. Down the road, you could move out of the primary residence unit and rent it out. Then, the buyer/investor could buy another home as a primary residence.
Funding Retirement With Rental Property
Some choose to fund their retirement years with rental properties instead of investing in the stock market. Many start early with the plan of paying down mortgages by retirement age (maybe even have the mortgages completely paid off by retirement). The properties then create an income stream during the retirement years to supplement social security and other retirement income. Basically, retirees would have a business to run, hopefully part-time, through retirement.
Tax Advantages Of Converting A Primary Into A Rental Property
As mentioned, buying a home as a primary residence first has many benefits for the owner. The IRS helps property owners with certain tax advantages. While living in a principal residence, typically homeowners may write off mortgage interest, property taxes, and possibly some closing costs. After converting the property to a rental, there is a potential window that the property may be sold without paying capital gains. Plus, owning rental properties allows for certain tax advantages while building equity. Make sure to thoroughly discuss plans with your CPA.
Keep in mind to always represent the property being purchased as to what it really is. This means do not say that a home will be a primary residence when it is really going to be a rental. Some buyers pretend that a home will be a primary residence so they can have a lower down payment and interest rate, but it is mortgage fraud and that brings severe penalties. Also, the ideas mentioned in this article do not represent investment, financial, or tax advice. Consult a tax professional, financial adviser, real estate agent, and a mortgage loan officer when considering rental properties.
Finally, never buy a property as a primary residence and convert it to a rental right away. There is nothing wrong with converting to a rental property years later, but it would be fraudulent to represent as a primary residence and immediately convert to a rental.
As you embark on your next real estate venture, remember to have trusted industry professionals by your side, time to dedicate to the investment, and the most up to date information on the status of the market and its ever-evolving trends.
