Guide

When To Buy Your First Rental Property

When To Buy Your First Rental Property
Written by Publishing Team

Deciding to invest in your first piece of rental property is the first step towards generating passive income and creating long-term wealth. The journey to build wealth can be very challenging and should not be taken lightly. Before investing your hard-earned money in a rental property, a wise investor needs a plan. Having a well-planned plan will help mitigate some of the risks.

Keep reading below to find out which items to include in your plan!

Select the type of rental property you want to own

The world of rental real estate is vast. There is a variety of properties for sale. From apartment buildings to trailer homes, investors have a wide range of choices when it comes to the types of properties to acquire. Given this fact, before diving into the wonderful world of rental property, it is essential to know what type of property you wish to acquire.

The couple hugs each other while looking at the property.

Source: Getty Images

Pursue industry knowledge

Once you have made a specific decision on the type of property you want, the next step is to gain as much knowledge as possible about that particular segment of the rental property industry. If you are wondering what type of content to start consuming, this article might be a good place to start. No matter what type of rental property owner you decide to become, knowledge of this industry is a must!

Set a budget

Once you gain some industry knowledge, the next step is to create a budget. The great thing about navigating the rental property market is that your budget doesn’t have to be big. When it comes to buying rental property, you don’t have to buy the following feature of the world’s most amazing rental property on Netflix. It’s good to start small, like a trailer or even an apartment.

Get pre-approved for an investment real estate loan

After creating the budget, the next step of the plan is to try to get pre-approved for an investment loan. Getting pre-approved for your investment property loan may come with more legal formalities, but the good news is that investors can explore many loan options. Investors can take out conventional loans, cash hard loans, private loans, or home purchase loans. There are many options to explore, but don’t miss an important pre-approval step; It will help guide your purchasing decision.

Start searching for real estate online

After getting pre-approved for a loan, the next step is to conduct an online search for real estate within the investment budget. The research should be consistent with the objectives of the first step of the plan.

Learn how to analyze a real estate transaction

In addition, learning how to analyze a real estate transaction will help you on your real estate journey. Learning this skill will help you determine the difference between expensive possessions and valuable possessions. For investors, your eyes should always be focused on value – and learning how to analyze a real estate transaction can help with that.

Analyzing a real estate deal can be a very long process, but the good news is that you don’t need to be a math magician to figure out the steps. The process can be quite long, and you will find different versions of this process on the web. The version will also vary by feature, so I’ll give you the abbreviated and generic version here.

  1. The first step is to determine the site and collect property information.
  2. Next, you will need to analyze the appreciation rates, rental strategy, and target tenants within the chosen location.
  3. Next you will need to do a financial analysis and determine the net operating income.
  4. Return on investment analysis.
  5. Determine the capitalization rate.
  6. Do a comparative market analysis (CMA).

Like I said, this process can be very long. If you need support, Zillow has a free public database that investors can use to estimate a home’s value based on similar and recent market sales.

READY TO BUY!

Once you have done the analysis, now might be a good time to contact a real estate agent because you are in good shape to purchase your first rental property.

While following a roadmap may seem like a bit of a hassle, it will help guide you on your journey to owning your first piece of rental property. As the saying goes, if you don’t make a plan, you plan to fail!

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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