Buying your first rental property can seem exciting and nerve racking all at the same time. It’s easy to become overwhelmed as you think about issues such as setting goals, down payments, property management and cash flow. Let’s take a look at 11 important tips that will help you meet your objectives when buying your first rental property.


First Rental Property


1. Understand Your Ultimate Goal


It’s important that you have a firm understanding of your end goal. Make sure to set goals based on overall investment strategy, realistic expectations and your financial situation. You should also answer these questions:


  • Do you already have sources of retirement in place?
  • When is your retirement date and how much income will you need?
  • Do you need cash flow immediately?
  • How much money do you plan to invest with rental properties?
  • Is it necessary to diversify your portfolio in order to reduce taxes or lower your risk?


2. Ask For Advice


Take time to talk to other landlords and get advice from people who have been there before. Remember that each person you talk to will have slightly different goals, experiences and buying strategies than you do. Finding out about any challenges someone else has gone through will help you make better decisions when it comes to overall strategy, selecting from the pool of available property managers or securing your loan.


3. Save Your Down Payment Money


You need to know how much money is needed for the down payment. It’s likely that you’ll need 20-30% of the total investment amount set aside in order to apply for pre-approval and start looking for your first investment property. Here are five quick tips that help when saving for the down payment:


  • Reduce your own rent or mortgage
  • Pay off all other debt
  • Set up an automatic savings deposit
  • Cut down on any unnecessary bills


4. Calculate All Rental Property Expenses


Every rental property comes with a certain amount of expenses that need to be covered. These might include property taxes and expected repairs. Certain towns, counties and states charge higher property taxes than other locations. This is an important distinction when making a decision on your first rental property.


Set aside money for repairs because there are always unexpected situations that come up in this area. A good rule of thumb is to have six months of emergency cash set aside to help with repairs or even an unexpected vacancy period.


5. Get Pre-Qualified For a Loan


Taking the time to get pre-qualified allows you to know which rental properties you are able to afford. Here are some basic qualification factors to be aware of:


  • The best credit score is 740, but 680 will probably suffice
  • You’ll need to prove whether you’re a stable risk if you’re a self-employed person. If you’re an employee, then proving that you’ve worked at your job for two years or more is good enough.
  • Prove six months of expenses have been saved
  • Show that you have the down payment money available
  • Prove a low debt-to-income ratio


6. Do Your Research


Do plenty of research before purchasing any property. Look at important buying factors such as job growth, population growth and city revitalization.


Are there any companies that have moved in and are providing more job opportunities? You might be buying in a good market if your research uncovers that the area is experiencing a large amount of new people moving into it. If the area you’re looking at is experiencing revitalization, then that’s a good sign.


7. Talk to a Local Property Management Company


Investigate local companies that provide property management services and ask them questions. Good questions to ask a property manager include:


  • What is the area’s average property rental pricing?
  • How often does the firm conduct maintenance checks?
  • How they handle tenant screening, rent collection. Do they have an electronic system to handle this?


8. Hire a Home Inspector


You can expect to pay somewhere around $300 or $450 to get a home inspection done. It’s worth every dollar to have this work completed. There are many potential problems that are hard to identify via a walk through of the property. Your home inspector will find any issues that might help you negotiate a lower price, force the current owner to fix items or even back out of a bad deal.


9. Analyze Cash Flow Projections


Take time out to analyze cash flow projections for the property you might buy. This is technically called studying the Pro Forma. These projections help you understand:


  • Potential monthly cash flow
  • Expenses
  • Expected ROI (Return on Investment)


10. Get the Home Appraised


Your lender won’t let you purchase without an appraisal. Your bank wants to see whether the appraisal price comes in close to the negotiated purchase price. For example, you won’t be able to secure a loan of $500,000 if the appraisal comes in at only $400,000.


11. Purchase Homeowners Insurance


Speak with a few local insurance agents and compare their packages, coverages and prices. You don’t want to leave your home unprotected when it comes to accidents. You should also take out an umbrella policy that provides a second layer of insurance protection. It will come in very handy if you’re ever facing a lawsuit from an angry, evicted tenant, for example.


You will become well prepared in purchasing your first rental home if you follow the above tips. It will make buying your first rental property a positive and rewarding experience and set you on the path for success.