5 Tips for Your First Rental Property Purchase
The world of rental property can be an intriguing market to enter, but becoming a landlord is fraught with both risk and reward. Before you decide to invest in a rental property, it’s beneficial to have a solid understanding of what it will take to become a successful landlord. As a California Licensed Real Estate Broker specializing in multi-family and being a rental property consultant, we’ve seen it all, or at least most of it. Today, we’ll examine 6 of our most important tips for your first rental property purchase.
Location, Location, Location!
You’ve heard it said before that “location is everything,” and that’s no lie. Before running off and purchasing your first rental property, you will want to do your research on the location of any property you are considering. The best way to do this is to get the help of an agent or broker who specializes in the area and the type of property you are looking for. Even if you cannot afford one of the best neighborhoods, there are many factors to consider that make a difference in the rentability of a property. Does the neighborhood have quality schools? What about proximity to public transportation, or access to a shopping district? Is the neighborhood considered walkable? How accessible is it to commute to high-paying jobs? A property that ranks highly on these types of criteria is more likely to attract good tenants and get you higher rents.
As a first-time landlord, the temptation to purchase a large property with multiple units can be great. Consider that a property with multiple units means multiple tenants to manage, which can translate into major headaches for a first-time landlord. Instead, we recommend purchasing either a condo, single-family home, or duplex as your first rental property. This will keep your tenants at a manageable number and reduce potential difficulties. If you choose to purchase a duplex, you may even consider living in one unit and renting out the second. This is a great way to ease into the rental market and discover if becoming a landlord is the right decision for you. In addition, a duplex can often be purchased for the same or lower cost than a single-family home. In addition, the income you make from renting the other half can help to pay your mortgage and reduce your own living costs. Another great option is to look for a single-family home that includes or has the potential to build an accessory dwelling unit (ADU). At Edrington and Associates, we specialize in this area of real estate and can help you find the perfect fit for your first rental property. If you have the appetite for going bigger, we can help there as well, we have experience in brokering, owning, and managing larger apartment buildings as well.
How Much Can You Manage?
Many rental property owners use a property management company to handle the day-to-day aspects of being a landlord. Depending on how many tenants you have and how busy you are, this may be a good option. While it does eat into your profit margin, it is less expensive than the potential costs and liabilities you could face from undermanaging your property. As a -first-time rental property owner, you may be tempted to handle maintenance and repair issues directly, but you should know when to call upon a licensed professional to ensure the work is done safely and to quality standards. Beyond a little elbow grease, there are other issues you will need to handle as a landlord. What if your renter is chronically late on payments? Are you prepared to handle noise complaints from the neighbors if your new tenant likes to party a bit too much on the weekends? Becoming a landlord can open a veritable “Pandora’s Box” of issues that can arise at any given moment. Being prepared for this reality can be a formidable challenge for a first-time rental owner. Therefore, selecting the right type of property with the right amenities and having good tenant screening criteria in place is essential. If you decide to self-manage your property, we recommend that you join your local Rental Housing Association and become a member. Sign up for their classes and education events and gain access to rental forms, tenant screening services, and a directory of vendors. The easy part is buying, the hard part is managing! Picking good tenants and managing the tenancy is critical to successful property ownership.
Understanding the Numbers
It is said you generally make your money when you buy the property. Understanding the income and expenses, and where one can add value to the property, is critical. Does your agent or broker have this background to advise you? If your advisor is a CCIM (Certified Commercial Investment Member, they will have the financial background to assist you in your purchase.
Generally, most investors use a loan to leverage their money. The bank will have a bigger stake in the property than you and will have the most say in the purchase. They will want to know that you have significant skin in the game, a large down payment, good credit, and they have adequate collateral to secure their loan. They want to make sure that if there is a problem you won’t walk away and leave them holding the bag. A major consideration for any property search is how you plan on paying for the property. Purchasing an investment property may require a larger down payment than would a property you intend to live in yourself. Loan requirements and interest rates may also be higher than owner-occupied real estate loans. On the other hand, lenders may consider the rental income in your qualification for the loan. If paying cash is an option, consider the return on your investment. Paying cash will leave you with a greater cash flow, but lower cash on cash return. A loan will give leverage and a higher return on investment.
Expect the Unexpected
Part of your responsibility as a landlord will be handling unexpected situations. Keeping some money set aside for unexpected repairs and maintenance costs is something that should not be overlooked. A good rule of thumb is six months of expenses to cover unexpected vacancies, non-payment of rent issues, and money to fix up units when they turn over. Will the rental income you generate produce enough to cover your mortgage, the repair fund and leave you enough profit to make the investment worthwhile?
Know the Laws in Your Area
Do you or your broker/agent have a good understanding of how to raise the rents in a rent control environment? At Edrington and Associates, we teach a class on this and help our clients navigate rent increases. As a broker and rental property consultants, we can tell you firsthand that it pays to have a firm grasp of your local laws and regulations when it comes to property management. In many cities, and now at the state level as well, it is impossible to evict a tenant without establishing just cause. There are also lease terms to familiarize yourself with, rules around how to handle security deposits, and fair housing laws to abide by. There’s an abundance of things you will need to educate yourself on to become an effective landlord. Again, join your local Rental Housing Association such as the San Francisco Apartment Association or East Bay Rental Housing Association. You will be required to know all laws and follow them. Not knowing the law is not a defense in court.
Entering the rental property market can be a great financial investment that can set you up with a steady, passive income for decades to come, but you should be prepared for the journey. Whether you are considering purchasing your first rental income property, or you have done this many times before, we highly recommend meeting with established rental property consultants and brokers to help analyze your situation and ensure that it’s the right move for you. At Edrington and Associates, we have decades of experience navigating the waters of Bay Area real estate. We hold the (CCIM) Certified Commercial Investment Member designation, the (CPM) Certified Property Manager designation and the (CCRM) California Certified Resident Manager certification. We can help you find the right property and advise you of everything you need to know about entering the rental property market. Contact us today and set up an appointment so we can discuss your opportunities.