Buying a Rental Property: a How-To Guide

January 5, 2017

Buying a house is one of the most stressful events in anyone’s life. How do you find the right home for your family, one that you’ll like for the next decade or more?

But buying a home to use as a rental property? That’s a whole different story. You have to look at a house through the eyes of a potential renter. What will entice them? What will scare them away? How can your house compete with others on the market?

Read our tips below and see what the experts say when it comes to finding and purchasing a rental property.

What Are the Right Questions to Ask?

A profitable rental property will pay the mortgage, property taxes, insurance, and repairs. Every potential investor should calculate one or two month’s of vacancies, in case the house doesn’t rent immediately.

A standard rule of thumb is that the monthly rent should be between .8 and 1.1% of a home’s value. For example, a house that’s worth $300,000 should bring in $3,000 or more in rent every month.

You can find comparable rents by searching on Zillow, Craigslist, and Trulia. Make sure to compare apples to apples. It doesn’t help you to compare a house with a fenced-in backyard and an extra bathroom if your property lacks both.

Brandon Turner, a real estate investor and author of The Book on Rental Property Investing, said figuring out the math is the most vital aspect to finding and owning a rental property.

“Unlike stocks or other investments, you really can get a fairly accurate estimate of what your future will look like, financially speaking,” he said. “Of course, there are numerous financial considerations we can’t know (economic conditions, job growth, etc.) a savvy investor can know reasonably well how much extra income they’ll add to their bottom line by understanding the total income and expenses on a property.”

Real estate investor and landlord Alexander Aguilar of Cash Flow Diaries said finding the right rental property involves choosing a house that will rent and sell easily when the time comes. Future landlords need to look at a potential rental property differently than they would at a house they’d want to live in.

“Do not get emotionally attached to one property,” he said. “If the numbers don’t work, walk away and move on to the next.”

Aguilar has three basic guidelines for buying a rental house: don’t buy a three or four-bedroom house with only one bathroom, don’t buy a rental in a high crime area and don’t buy a rental in a city that has a decreasing population. The latter rule might require you to search for properties outside of your hometown so you can find a rental-appropriate house.

“By following those rules, you are setting yourself up for a smoother exit strategy if indeed you ever need to exit the rental property game,” he said.

Include any major repairs in your budget if you’re looking at a property that needs some repairs before it’ll be ready for tenants. You should also calculate how long it’ll take for the work to be completed, so you know how many vacant months you’ll have.

A rental property can provide passive income and allow you to retire early or enjoy a higher standard of living, but only if it’s the right property. Making the wrong decision can lead to bigger financial problems, like foreclosure or bankruptcy. Anytime you buy a home you’re making a huge decision and a major investment.

Talk to other people you know who are landlords in your city. They can share their experiences and any advice they have for someone starting out.

Send this to a friend