Buying Your First Rental Property?

If you have joined the ever-growing number of people who are purchasing rental properties in Redding, CA. , we're happy to report you have just taken the first step to building your real estate empire. If you're willing to do a little research, put in some time and effort to get excellent properties and tenants, and get your finances in order so that you won't have any problems obtaining financing, your rental property will be a fantastic way to generate passive income for many years. However, since this will be the first property you are buying for your new real estate adventure, we've got a few tips you should always keep in mind when buying rental property.

Before you decide to go all-in on creating your rental real estate empire, we suggest you take a deep breath and truly think about if it will be the right move for you. After all, buying a rental home and then dealing with tenants and other matters is not for those who consider themselves to be faint of heart. But on the plus side, making smart decisions along the way can lead to significant returns on your investment. On average, rental investors had a gross yield of nearly 10% on their properties, demonstrating the tremendous financial possibilities that exist.

Once you've given it careful thought and decided you have what it takes to be a great real estate investor, we suggest you start looking at the best ways to get the mortgage you'll need to purchase your first rental home. In our experiences, we've always found using online mortgage calculators works very well. Along with helping you decide how much house you can actually afford, you can also use the calculator to get a good idea of interest rates, monthly payments, and other vital information. In fact, before we ever hand over our down payment on any rental property, we spend plenty of time using a mortgage calculator.

If there is one thing we are sure you don't want to see happen, it is finding the perfect first property for your rental empire, only to find out you can't get the financing needed to make the purchase. While that happened to us as well a time or two early on, we quickly figured out that getting pre-approval for financing saved us plenty of time and heartache. Once you secure pre-approved financing, you'll know exactly how much money you'll have to work with when searching for properties. Thus, once you find that first special property you just know will have excellent tenants who pay their rent on time each month, you'll be able to buy it before someone else swoops in and gets it at the last-minute.

Believe it or not, we've found from personal experience that you don't have to have the absolute highest credit score in order to start building your rental real estate empire. In fact, you might be surprised to learn that to get a fixed-rate mortgage, you'll only need a minimum credit score of 620 and the money to make a 20% down payment. However, if you happen to have a credit score of 720 or higher, you will likely receive a much better interest rate. 

If you're like we were when we first started buying investment properties, you probably have no idea what the 2/2/2 Rule encompasses. While it may sound a bit odd and intimidating, it's actually very simple. By 2/2/2, we are referring to two years of tax returns, two years of W-2 forms, and two months of bank statements you will be required to provide to your mortgage company prior to gaining approval for financing. In addition, we should also add you'll need to let your lender verify your assets, and you may also need to have at least six months of mortgage payments at the ready should unexpected financial challenges come down the path at some point.

Before you ever sign on the dotted line prior to buying rental property, we cannot emphasize enough that you spend some quality time determining the property's R.O.I, better known as Return On Investment. To do so, figure out the property's net annual income, which is what will be leftover after you've paid taxes, insurance, and accounted for such things as repairs and periods when the property may be vacant. Once you've done this, take the property's annual income and divide it by what you spent on the property. As an example, if you spent $100,000 for your rental home and figured the property's annual income to be $7,500, your R.O.I would be 7.5%. If this is the case, we suggest you've made a good decision and should make the property the first addition to your portfolio.

As we learned the hard way when we first started buying rental property, fixer-uppers are not the deals they seem to be on the surface. In fact, this is probably the worst decision you can make if you are serious about buying real estate for investment purposes. While you may think that with only a bit of work the property will be a source of constant cash flow, we can attest it will likely be nothing but a money pit that gets deeper and deeper. If you're not careful, you'll buy homes that have no interior walls, rooms that flood, and much more. However, if there is any silver lining in this, it may come if you happen to be quite good at home repairs. If you can do the work yourself, you can save tremendous amounts of money on labor, which might help you make a profit. However, we still recommend leaving the TLC homes to other people.

If you like being awakened at three in the morning to unclog a toilet, spending time trying to collect rent, and don't mind having to evict someone now and then, you'll probably make a great landlord. However, we highly recommend considering hiring a property management firm to handle these and many other details. By doing so, you'll have more time to continue building your portfolio and enjoying the passive income your property is generating.

Once you take the plunge and purchase your first rental property, we suspect it won't be long until you've discovered the many benefits of passive income and are quickly buying even more properties.