What are the steps you need to take before buying a rental property?
If you're considering buying a rental property in Orange County, California, now is the time. Prices are low, and so are the interest rates, so if becoming an investor is on your mind, go for it. According to the real estate website, Zillow.com, prices haven't been this low in many years. The market is doing better, and the timing is perfect. Prices are low, and so is the cost of borrowing, so what better time to buy a rental property.
You may have heard that buying rental property is a great way to make money, and you may be thinking about getting into the rental property business. You want to be a landlord? Well, good. But keep in mind that it's not going to be all hearts and flowers, and there are certain things that you need to consider before buying a rental property. One of the first things you're going to want to consider is the type of financing you'll be able to get in order to get into the rental market.
That said, jumping into the rental property business shouldn't be done on impulse. It's like anything else - you don't go swimming without taking lessons, you don't bake a cake without reading a recipe, you don't go skydiving without learning how to properly pack a parachute, and you don't buy a rental property without having some concept of what you're doing.
Know What's Out There
Not all investment properties are created equally, so you need to decide what type of property works best for you. Are you best equipped to handle a single-family dwelling with a stable renter, or are you equally comfortable with a multi-unit building and renters who may come and go, often without much notice?
Find a Mentor
First-time investors can learn a lot from experienced real estate agents, and it works both ways - they can guide you how to buy a rental property, and when you're ready to sell, you can return the favor. You can also talk with other real estate investors, who can tell you about some of the challenges they've faced.
If you're buying a property with the intention of renting it, location is everything. Ideally, you want a home in a highly populated, high-rent area - avoid rural areas where there aren't a lot of people. You would also want to buy a rental property in good neighborhoods with a low crime rate that are close to shopping malls, public transportation and other amenities. They'll attract better tenants, and also buyers if at some point you should decide you want to get out of the rental business and sell later.
Show Them the Money
If you're looking for lenders, they're going to want to know that you have enough ready cash or assets to be able to handle the difficulties that can come with real estate investing. For example, if you're buying a rental property, you have to be sure that you can handle the mortgage and other expenses if you should temporarily be without a renter. Ideally, you should be able to cover about six months without income from your property. Remember too, that if you're buying a property to fix up, rent for a while, and then sell, it could sit on the market for several months, during which time you'll still have to pay the mortgage, taxes and upkeep. Lenders need to know that you've got it covered.
Use Your Common Sense
Keep in mind that when you're buying a rental property, it's very different from buying a home for yourself. You take pride in your own home, and you want to show it off. You pour money into it because it's where you live - it's part of your identity. When it comes to your rental property, emotions have no place in the equation. You're in this to make money, pure and simple, so you have to ask yourself how you're going to make that happen. Don't make the mistake of tying up your whole identity in being a "property baron". That's not what it's all about. Do what makes you money, and if it isn't making you money, sell.
How Do You Get Financing?
When buying a rental property, finances play a major part. It used to be easy before. Everybody wanted to lend people money to get into the rental property business. These days, it has become a little more difficult, but if you have a good income and decent credit, chances are good that you'll be able to borrow money for buying a rental property.
The easiest way is to buy as an owner-occupant. That means that you buy a home as your primary residence, and you live there for at least twelve months, and rent part of that home out. This gives you great financing options.
Then, twelve or so months later, you buy another property. And you rent out the one you were living. Rinse and repeat.
You do this when you don't want to live in the property. You can expect that you'll need to make at least a 20% down payment. You'll have to have good credit, and you'll have to qualify for investment property financing. The bank might include some of the rental income from the property to help lower your debt-to-income ratio, particularly if your unit already has a tenant in place who is paying rent to offset the payments on the property.
You'll still have to have a good credit rating, and you'll have to qualify for investment property financing. But you'll probably be able to collect your first month's rent even before your first mortgage payment comes due!
Any mortgage loan today is higher than it used to be. And as a non-owner occupant, expect to pay more. Ideally, what you should do is to meet with at least three lenders, and find out what they have to offer when buying a rental property. Visit a bank in Orange County, a mortgage broker, or even look online. Different lenders are going to have different requirements and different programs. A bank might conceivably reject you, but a mortgage broker may be a little more flexible. You'll probably be able to find a program that works for you and your particular situation if you just shop around.
If you have a good credit rating, you can buy a rental property, or possibly even more than one. The important thing is to educate yourself on the ins and outs of rental property ownership, and don't assume that it's going to be easy. Right now is a good time to buy investment property, but do your homework.