Preparation is the key to success with your first rental property.
If you want access to this lucrative source of passive income, read on for nine tips to help you navigate the complex, exciting adventure that is real estate investing.
Get Started with Park Place Finance1. Ensure you’re financially prepared
Financial preparation in the context of real estate investing can look a lot different than it does for a regular homebuyer.
If your previous experience with financing for real estate was a conventional purchase, you may be happy to know that investors have access to more flexible types of financing.
Hard money loans are most commonly used by investors due to their closing speed and versatile requirements.
Approval for these types of loans is focused more on the property’s expected cash flow than on your personal income.
So while you will not need to share W2s, tax returns, or pay stubs, a hard money lender will be interested in seeing your credit score as a gauge for your overall financial health and ability to pay your debts.
In addition to your credit, you’ll need to make a down payment and meet requirements for liquidity and reserves.
Financial preparation also involves having a realistic budget — which ultimately will drive your location and research.
2. Do your research
Thorough market research is crucial for the success of your rental property and mainly revolves around location.
You will need to identify areas with strong rental demand and the potential for property appreciation.
Investors also must consider the following factors:
- Strength of the local economy
- Job growth
- Diverse range of industries
- Population trends
- Nearby hospitals and schools
- Entertainment
- Nature and wildlife
Some factors may be more important than others depending on whether your property is meant to be a long-term or short-term rental, such as a vacation rental.
The best way to get insights into the local economy is to build relationships with local professionals, including real estate agents, property managers, and inspectors.
3. Get a property inspection
A real estate investor who was recently featured in Business Insider said the biggest mistake he made early in his career was not getting a property inspection.
The error cost him an additional $30,000 in unexpected repairs.
While your hard money lender will order an appraisal to determine the property’s value, ordering an inspection can help you to properly budget for repairs — or avoid the property if there are any major hidden issues.
4. Determine your role
Are you interested in becoming a landlord, or do you plan to hire a property management company?
If you plan to do it yourself, you must understand the legal obligations involved as well as have a plan in place for screening tenants, managing leases, and handling maintenance.
If you choose to hire a property manager, they will specialize in the day-to-day management of rental properties.
You can benefit from their expertise in tenant screening, lease management, property maintenance, and rent collection. They also should understand local rental laws and regulations.
5. Know your local and state laws
Regardless of which route you choose — property management or landlord — partner with a local real estate attorney who can help you navigate the legal matters related to property standards, leases, and landlord-tenant issues. Real estate attorneys can help to ensure that you are in — and remain in — compliance with local and state laws.
6. Understand your loan options
One of the most exciting parts of the process is the financing that will help you purchase your first rental property.
Real estate investors have numerous loan options for rental properties, and the right one for you depends on your unique goals and scenario.
The most popular loan option for rental properties currently is the debt service coverage ratio (DSCR) loan, which allows investors to qualify for a loan based on the property’s cash flow.
If you plan to fix-and-flip the property to rent, you may qualify for a fix-and-flip loan that provides the funds for a purchase and renovation. Fix-and-flip loan qualification is based on the after-repair value (ARV) of the property.
Park Place Finance also offers ground-up construction loans and bridge loans, which provide short-term funds to help you build or purchase a property.
A trusted, experienced lender such as Park Place Finance can help you navigate which loan option is right for you.
7. Know your exit strategy
Private money lenders will request that you define your exit strategy, which includes factors such as your timeline, how you will sustain your rental income, whether you intend to sell or refinance the property, and ultimately how you will pay off the loan.
An effective exit strategy should align with your financial goals, risk tolerance, and market conditions.
8. Build a support team
Your support team will help you navigate all aspects of your rental properties — from market research to your legal obligations and financing options.
Your team should include the following types of professionals:
- Private money lender
- Tax advisor and/or CPA
- Financial planner
- Real estate attorneys
- Local contractors
- Home inspectors
- Property managers
- Insurance agents
Depending on how many properties you have and where they are located, you may need to have these networks of professionals available in each of your property’s locations for specific and targeted support.
9. Consider your marketing strategy
What is your plan for attracting tenants?
It may be as simple as posting on Apartments.com whenever you have a vacancy, or it may involve an online or social media presence to attract people to your property.
Either way, have a plan in place for keeping vacancies to a minimum so you can ensure a steady stream of income at all times.
Apply for a loan with Park Place Finance
At Park Place Finance, we pride ourselves on providing you with a personalized and efficient lending experience.
As a direct lender with in-house capital, we have funded over $1 billion in loans across the nation.
Easily apply online to be connected with one of our dedicated Account Executives.
Your Account Executive will let you know what’s needed to get your deal approved and funded.
We look forward to helping you find the right loan to reach your financing goals!
Get Started with Park Place FinancePhoto by RDNE Stock project