It’s common knowledge that real estate is one of the time tested ways of building wealth throughout history. That’s very much the same way today, and give the fact at recent numbers show 36.6% of people in America are renting , gives even more opportunity to would be investors.
That said, owning rental properties can be quite difficult and is a huge commitment of both time and money. Before you get too far down the path, it’s prudent to educate yourself on what owning rental properties entails and what it takes to be successful. Below we outline some tips to consider before you get started.
Know Your Own Financials
The first step of buying a rental property is typically talking to a lender and making sure you qualify for financing. Knowing your credit score, personal debt amounts, and cash on hand are all going to be things that the bank will need to know. If the bank doesn’t see you as someone that is strong enough financially to cover two properties (or more) in the event of difficulties, they won’t lend you the money to make the purchase.
If you are currently have outstanding debt from credit cards, hospital stays, or high interest student loans, it likely makes sense to focus on those first. Rental property can provide positive cash flow to increase the money coming into your bank account, but it’s important to know that sometimes it will do the opposite despite your best laid plans. Make sure that you have the rest of your debt under control and enough savings to cover your costs in the event that things don’t go as planned with your rental property.
Be Realistic About The Type of Investment
The next step, assuming your debt-to-income ratio is in check, is to consider what your realistic budget would be for a rental property. You’ll need to know what your income is including what your true “disposable income” is. It’s a good idea to use a mortgage calculator like this one to get a ballpark idea of what the mortgage would be based on the selling price. It’s important to consider that you may need to cover some months of this mortgage out of pocket if you have a vacancy in your rental property.
Another consideration is your credit score. If you have anywhere south of a 650 credit score it’s likely it will be very difficult for you to qualify for a mortgage on a rental property. Realistically, you probably should focus on getting your score above 700 if you’re serious about owning a rental property. With the right steps, it’s possible to turn your credit score around fairly quickly and it can help you save money on interest rates in the long run.
What About The Down Payment?
In almost every scenario, investment properties typically require a larger down payment than what’s available for your primary residence. Typically a lender will be looking for a minimum of a 20% downpayment for standard loans. That obviously doesn’t include additional buffer cash that you will need in case of trouble. Additionally, you’ll need to remember that typically banks won’t do any “escrow” in this type of mortgage. That means that you’ll get an annual insurance bill and in some states two different tax bills that will come through the year. Some areas of Lancaster County, including Lancaster City have very high real estate taxes. You’ll need to make sure you’re planning for those as your bank is not collecting that money from you.
Educate Yourself on the Realities of Owning Rental Property
Now that you understand some of what is required in order to even qualify to buy a rental, you will need to decide if it’s really the best decision and if you have what it takes to be successful.
If you’ve been a homeowner for any length of time you’ll understand that maintaining a property can be a lot of work. Sometimes it can feel like the projects are never ending. You can go ahead and double this for a rental property. Not only are you doing to be working on normal “wear and tear” items, but you’ll also quickly find out that tenants often don’t treat the property as you would. They’re harder on things than they might otherwise be because they’re not theirs. This increases the amount of work involved.
It’s also important to know your skill set. Do you know how to paint or replace light fixtures? How about doing basic plubing repairs? These are things that you can certainly hire out, but they will definitely eat into your bottom line if you’re not taking them on yourself. If you’re not handy and don’t want to drop what you’re doing to go fix things at your rental properties, you may want to reconsider your strategy of rentals properties.
Get Quality Advice
The best thing you can do if you’re really consider buying rental properties is get good advice every step of the way. First, it’s a great idea to talk to current landlords. Find out what they typically do and what their challenges are. You may want to ask them about what they budget for things in the Lancaster housing market like repairs, vacancy, etc. They can also be a huge help when you’re dealing with challenges at your rental, so develop good relationships with people who will give you quality advice.
If you decide to use a Lancaster real estate agent to find your rental property, make sure they have experience with rentals and should own rentals themselves! This is not a good time to use an aunt or family friend who is an agent but has never owned a rental property. In fact, that’s often a surefire way to end up in the wrong investment.
Finally, you’ll likely want to have a home inspector look at the property to try and avoid any issues you might have right out of the gate. This can cost some money upfront, but can save you thousands in the long run. Even better is having a quality contractor or handyman that you trust walk the property with you. They will be much more upfront about what are “real” issues and what may just be more cosmetic than a home inspector.
Are you considering buying a rental property in Lancaster? Perhaps you already have one that you’re looking to sell? We’re always interest in buying rental properties at We Buy Lancaster Houses! Give us a call today at (717) 715-0010 or contact us here to find out what we can do for you