So you’re planning to buy your first rental property? Congratulations! This is a massive step for any investor. Although rental investments are considered a passive income-generating machine there is still some work involved. So, before you can find lucrative investment properties and live out your empire-building dreams, you need to start with the basics.
At Optio Money, we believe it is essential to be armed with the correct information to make the process as smooth as possible. Let’s get into it.
Is Investing in Property the Right Move for You?
Rental property investment certainly isn’t for the faint of heart. There are innumerable operating costs, including property management costs, tenant management costs, and mortgage expenses to consider – not to mention variables like bad tenants. You also need to have a risk-positive mindset to get into the business, as it is riskier than stock market investment. The annual average return for real-estate investors had been 4.8% over the last ten years. But the more you gamble, the more opportunity for returns over 9%.
What Are the Requirements for Purchasing a Property?
Let’s start with the financing options. You can opt for a fixed-rate mortgage or an adjustable-rate one. Be sure to do your research on which one works best for your financial situation. You’ll also need a minimum of 620 on your credit score. Remember – the higher your credit score, the less interest you’ll pay. Next, you’ll need to put down a down payment – anywhere between 5-20% is the norm. You’ll also need supporting documents such as two years of tax returns, two years of W-2s, and two months of bank statements.
Will You Hire a Property Manager?
One of the most important decisions you’ll need to make is if you want to assume landlord status or not. If you’re living nearby and prefer a more hands-on approach, you could become a landlord. However, this can be time-consuming and an effort-suck from other, more important things. If you hire a property management company, they will market your property, collect rent on your behalf, do background and credit checks and deal with maintenance problems and tenant complaints. However, the downside is that these services come at a steep cost – sometimes upwards of 8-10% of the rent cost!
How Will You Protect Yourself (and Your Assets)?
Insurance is an absolute must for every property owner. Your tenant needs renter’s insurance to cover their possessions, but you need to have landlord insurance to cover property damage, lost rental income, and liability protection. In addition, forming an LLC or limited liability company will come in handy in protecting your assets. To create an LLC, you could use a formation service. This is significantly less expensive than hiring a lawyer for the job.
The cost of creating an LLC varies from state to state, so you need to research your options. Historically Delaware and Nevada have been considered the best states to incorporate in because of their streamlined filing processes and lack of corporate income taxes. Other states like New York, New Jersey, Connecticut, and California have high startup fees for LLCs and onerous taxes. But the best place to consider first is your home state, so for instance, Virginia can be surprisingly affordable, as can South Dakota, Alaska, and Wyoming, while the LLC taxes in Florida can be pretty high.
What Are Your Operating Expenses and Returns?
According to My Mortgage Insider, operating expenses for properties can be anywhere between 35-80% of your overall operating income. You’ll want to ensure you’re getting a great return on investment for your operating costs. However, don’t compare your ROI to stocks or bonds just yet – the first year of property investment typically yields 6% but will appreciate with time.
Buying a rental property is one of the best ways to generate a steady and consistent monthly income and put aside money for the long term. However, success in this venture will depend on how much research you’ve done, your risk appetite, and your goals and plans. Be sure to do your due diligence before signing anything, and then dive into the game that is real estate.
Figuring out funding is the first step in the investment property process. Optio Money has been in the financial publishing business since 1995, helping investors like yourself with trend forecasting, inflation, and family finance. Check out our mortgage information here or browse the site for more resources today!
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