Getting Started Owning Rental Property

Dated: 04/05/2017

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In our business, we talk to investors every day - people looking to buy rental properties, develop land, or fix and flip homes. While many already have a stable of properties generating income, the majority are just getting started in real estate investment.

Nashville is a booming market - we're seeing 80 new people moving in daily looking for housing to buy or rent. Likewise, investors - from individuals to corporations - are scooping up homes to rehab and rent out. With so much growth potential, it only makes sense why demand is high and inventory is low. If you're considering jumping in, here's a few things to consider before buying your first investment property.

How Hands On Do You Want To Be?

How are you going to respond to a 3AM call about an overflowing toilet? Are you going to patch that drywall yourself, or hire someone? Hiring someone else saves your sanity, but cuts into your profits. Aside from that, you'll need to make sure you're adhering to all laws and guidelines when it comes to screening and finding tenants. Keep in mind - your first rental will have some growing pains as you learn what you should and shouldn't be doing, and it's certainly work.

One thing to consider is a property management company, like the one The Andrews Group operates. You'll still have say over how your home is taken care of, but you won't have to worry about rent collection, applications and screening, or dealing with repairs. Especially as you acquire homes or if you live beyond easy driving distance, a management company is a must have.

Make Sure It's The Right Time

Most of us have some degree of debt - even if you car and credit cards are clear, you likely still owe on your home. However, if you're carrying a lot of debt - student loans, multiple cars, or old medical bills - you're not likely in a position to buy rental property. Regardless of your income, taking on another loan may not be the right move. If that puts you years out from buying your first property, then flipping might be a better approach as long as it's done cautiously.

How Much Can You Put Down?

There are plenty of loan programs targeted at getting people into their own home, but buying investment property is different. Any purchase that isn't "owner-occupied" will have tougher requirements and a larger down payment. If you don't have a minimum of 20% to get past the mortgage insurance requirement, you'll need to look at other options.

Beware the Rate Creep

Interest rates have sat at historic lows for years now - but that's finally beginning to change. As the market shows increased signs of health and stability, interest rates are starting to return to equilibrium. While that's a great sign for the economy, it's not great if you're buying a rental property. Borrowing for an investment home almost always has a higher interest rate attached.

The higher the rate, the higher the payment, the lower your profits.

What Are Your Margins?

You'll hear the word "ROI" and "margin" get used a lot. Essentially, how much are you making? Investment groups have big overheads to pay, so they're aiming for around 6% return on investment. For you, with a staff of one, your goal should be about 10%. You'll need to keep a lot of factors in mind - insurance, HOA, preventative maintenance, and lawn care or landscaping - when calculating your margin. As a rule of thumb, assume 1% of the home's value in maintenance costs annually.

Don't Buy Yourself a Chore

Everyone wants a deal, and when you first start looking it can be tempting to buy a home that needs major TLC. While you might save initially, the cost of rehab and reno, added to the all the time your home isn't filled with a tenant can destroy your profits. Unless you're a contractor or skilled in major renovation, and you happen to have a lot of time on your hands, a fixer-upper is more likely to cost than make you a profit.

Want proof? Look around your home for all the fixes and improvements you've been meaning to do, and how long they've gone undone. Now consider how motivated you'll be when it's not even your house.

How Much Are You Spending?

We mentioned this is a business, right? That means knowing where your money is going at all times. For example, if your rent on a property is $1200, but your mortgage payment is $600 and your average maintenance cost is $200 a month, your overall operating expenses are at 66%. See how much a mortgage can cut into your profits?

While operating expenses can be all over the board, and some landlords have costs up to 80%, your ideal target should be around 50% .If you're not sure what a home is worth, check average rental prices for similar homes. Just keep an eye on how long they've been available - an empty home may mean it's overpriced and not making money for the owner.

Own Your Numbers

For every dollar you invest, what is your return on that dollar? On average, stocks will return 7-8% on the dollar, while bonds may pay 4-5%. If in your first year owning investment property you make 6%, that's a positive because your return should go up as property values rise and what you owe on it decreases.

Find the Sweet Spot

A high-price home means high maintenance costs and more time spent empty between renters. On the flip side, low price homes face tons of competition from first-time home buyers, large investment groups, and flippers.

In Nashville, this often results in multiple offers that drive the price far above asking and requires all cash to win. While every neighborhood and market is different, aim for $150,000-175,000 for your first property. Yes, you'll still face competition, but you can win at that price point without breaking the bank.

Just remember - competition means no low ball, no matter how good the terms, will win you a home.

Location, Location, Location

Few homes have it all, while still staying cheap enough to be considered as investment properties. Still, where you buy makes a big difference in your expenses and what you can charge. Aim first for lower property taxes and decent schools - you need to protect your profits while ensuring you can sell the home easily when you're ready. Then consider crime statistics, job potential, and amenities. People will pay more to be near great restaurants and shopping, but how much more?

Ready to buy your first property? Need help managing your existing inventory? Ready to get out of the game and need to sell them off?

Whatever your needs, Weichert Realtors can help. Give us a call at 615-383-3142.

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