Buying First Rental Property is an opportunity to create a steady flow of passive income and an investment option. Rental Properties are less likely to be affected by market volatility and more likely to generate fixed returns. The current demand for rental properties is higher than before due to house prices rising to make buying first-time rental property a popular choice.
Risks of being inexperienced for first-time buyers in rental properties.
- Not running adequate checks on a potential tenant.
- Thinking the property will always be rented.
- Underestimating the cost of repairs or ongoing property maintenance.
- Viewing it as a hobby.
- Not letting tenants sign a lease agreement
- Neglecting tenants.
- Not care regularly check in with your tenants and on the condition of the property.
- Not enforcing lease terms.
Owning a rental property can make a profit, but can end in financial harm if the financial risks are not considered. Rising Taxes, lack of liquidity, insurance premiums, difficult tenants, unfavourable changes to the tax code and minor and major repairs arise. Rental properties grow wealth by providing a monthly income, they typically appreciate in value over the long run, and they harness the power of debt leverage.
You will need to do some research work or some suburb analysis work. You need to consider the following. What is the population like? Is it growing or declining? Consider how suburbs are primed for growth and increase your chances of getting a great return on investment. For an investment property, you want something that will have high rental demand. Do plenty of research into what types of properties renters are renting. You don’t want to invest in a property in an area that is declining.
Properties with extras such as a second bathroom, lock-up garage or good outdoor space will help your property to stand out from the rest. For more information on finding a popular rental property – Property Investment for Beginners: A Property Geek Guide Paperback – April 18, 2013, By Rob Dix.
1. Understand Landlordship
Being a landlord can take many forms. Being your own boss and substantially building your net worth or consider a property owner who can do nearly all the work for you. Becoming a landlord is hard work and consideration that goes into managing a rental property. It’s important to understand what being a landlord entails.
- Collecting deposits, advertising for new tenants and completing legal agreements and taking care of utilities
- If you don’t want to handle the day-to-day tasks, you might consider a property management company
- As a landlord, find a real estate attorney to help with legal issues. There are several laws involved with renting, and address issues like late rent, security deposits, lease agreements and repairs.
- Finding good tenants takes time and if your tenants aren’t so great, you will need to know how to evict bad tenants.
2. Do not have Debts
Too many personal debt obligations such as car loans, student loans and credit cards may affect your chances of getting an investment loan as lenders consider other costs that will be added to your current expenditure such as property taxes, homeowners insurance, and maintenance. Mortgage lenders look at applicants’ debt-to-ratio. This is the amount of debt you have relative to your income. Reducing or eliminating any credit card debt or personal loans not only helps you reach your savings goals quicker, but will also help increase your borrowing power when it comes to property investment for beginners.
3. Understand Business Finances
First-time rental property owners should treat the rental property as a business. Start small with one property and grow. Open a bank account specifically for the property, and keep track of expenses and income. If you want to invest in real estate rental property, think about leveraging your own home first. You can do this by using the equity in your home as a down payment for a new property or simply renting out your existing home while you move into a new one.
Financing your investment property can give you a good return. For an investor who puts down 20% on a house, with compounding at 4% on the mortgage, after taking out operating expenses and additional interest, the earnings add up to roughly $5,500 per year. Cash flow is lower for the investor, but a 27.9% annual return on the $20,000 investment is much higher.
4. Learn from Experienced Landlords
Learning from an experienced landlord will ensure you have a good relationship with rental tenants. The following are good traits of a landlord.
- Good communication skills are fast to answer questions, act quickly in emergency maintenance situations and are easy to deal with. Landlords make use of real estate or leasing agents as middle-man to assist.
- A good landlord will ensure that repair and maintenance are done quickly and ensure the property is clean and well presented.
- A good landlord will make sure that lease agreements and all information is recorded and signed.
- Good Customer service keeps tenants happy, renting is a business agreement and ensures ongoing business, good relationships and turns a profit.
- A good landlord is fair and reasonable and knows the difference between normal wear and tear and genuine damage to the property.
5. Know Rental Restrictions
Rental owners need to be familiar with the landlord-tenant laws in their state and locale. It’s important to understand, for example, your tenant’s rights and your obligations regarding security deposits, lease requirements, eviction rules, fair housing, and more in order to avoid legal hassles.
If you are considering investing in vacation rental properties for beginners, then some cities have several restrictions and regulations when it comes to short-term vacation rentals. Be sure to consult local rental policies once you have an idea of where to invest.
6. Retrieve the Down Payment
A down payment is a money that you pay toward the purchase upfront, for example, a 20 percent down payment on a $300,000 home is equivalent to $60,000. By paying a higher down payment the buyer can get a lower interest rate because the risk by the bank has been reduced with a higher down payment.
Your ability to reclaim your earnest money (down payment) and other payments depend on your contract terms and the reason the sale was cancelled and local laws.
7. Solve Financial Problems
Having a negative cash flow rental property means that you will use money from your pocket to offset some expenses. It’s not just maintenance and upkeep costs that will impact your rental income. Emergency does occur — storm damages, flooding due to natural causes or faulty plumbing. Plan to set aside 20% to 30% of your rental income for these types of costs, so you have a fund to pay for timely repairs. Operating expenses on your new property will be between 35% and 80% of your gross operating income.
Ways to Solve Rental Property Cash Flow Problems are to Increase the Rental Rate, Screen tenants, keep tenants happy, rent parking spaces and garages separately, have tenants pay their utilities and do regular property checks. By implementing some of the ways you will be able to improve your rental property cash flow.
8. Calculate Interest Rates for Rental Properties
Divide the annual return by your original out-of-pocket expenses (the down payment of $20,000, closing costs of $2,500, and remodelling for $9,000) to determine Return on investment. Return on investment = $5,016.84 ÷ $31,500 = 0.159. Your ROI is 15.9%.
The interest rate on an investment property is higher than a traditional mortgage interest rate. If you do decide to finance your purchase, you need a low mortgage payment that won’t affect monthly profits too much.
9. Calculate Margins for Rental Properties
When determining market rent you want to take supply and demand into consideration. You should research to find out what similar properties in the area are renting for. If the demand is high, you may be able to set a higher rent. Once you have an estimate of what your annual income would be, you can deduct the property’s annual expenses to calculate the estimated ROI.
10. Value Single-family Homes
The value of single-family houses depends on the capital city, prices are based on Australia’s median house prices – June Quarter 2021.
- Sydney $1,410,133
- Melbourne $1,022,927
- Brisbane $687,236
- Adelaide $629,728
- Canberra $1,015,833
- Peth $595,820
- Hobart $646,301
- Darwin $608,519
- National $955,927
11. Have Rent Payments
It is vital for first-time rental property owners to collect rent payments on time each month. When tenants fail to pay their rent on time, many landlords’ first action is to evict those tenants. This should be a last resort as it takes a considerable amount of time and money. Here are some tips to get your tenants to pay rent on time. Landlords need to communicate clearly when the rental payments are due. Direct Debit or standing order will ensure tenants don’t forget to make payments on time. Discuss options with tenants to pay rent more frequently in small amounts over the month. Charge a fee for late payments.
12. Agree with a Property Management Company
When buying a first rental property is not just about buying a property and renting it out, it means understanding the legal rights and responsibilities.
Property management companies look after your rental property, as they take a lot of the responsibilities out of your hands. They know the provisions of the Residential Tenancies Act 1995 Property management companies arrange inspections and reports, advertise the property for lease, can select the tenant on behalf of the first-time rental property owner, collect rental arrears and deal with any complaints.
Your local Property Management company is a good source of advice for issues such as capital gains tax, insurance, land tax, security and maintenance on the property.
13. Audit the Prospective Tenants Thoroughly
Here are some ways to audit the prospective tenants:
- The tenant does indeed make the income that they claim to make
- The tenant has a good rental history that can be verified by previous landlords.
- The tenant has a good credit history
14. Understand Fixer-upper’s Effect
Buying and renovating a Fixer-upper property is a long-established way for property owners to maximize returns on investment. To make a profit on a fixer-upper, the purchase price plus the total renovation cost needs to be low enough that you can recover your investment and make a profit when you sell.
15. Provide a Positive Cash Flow from Earlier
Ways to Solve Rental Property Cash Flow Problems are to Increase the Rental Rate, Screen tenants, keep tenants happy, rent parking spaces and garages separately, have tenants pay their utilities and do regular property checks. By implementing some of the ways you will be able to improve your rental property cash flow.
16. Learn the value of Outdoor Space for Rental Property
Add value to your rental property by adding outdoor living space here are a few outdoor upgrade ideas:
- Swimming pools are great for health-conscious tenants and families with young children
- Outdoor Kitchens, Outdoor kitchens can provide a Return on investment of 100% to 200%.
- Camping experience without actually having to go camping, a fire pit can give that experience.
- A patio makes a valuable upgrade to consider for a property. It’s a great addition for tenants and a good place for small get-togethers. Patios can provide an ROI of up to 100%.
- Decks can increase your property’s area by adding to the square footage of your home. This extendable space allows you the ability to quietly enjoy nature.
- Car shelters are multi-purpose spaces as, they’re protecting vehicles, serve as a shaded play area for children
17. Use Property Inspectors for First Rental Property
One of the advantages of using property inspectors that inspect the building and pest control will help make a choice when deciding to purchase or not. Home inspection reports will pinpoint both major defects and minor problems with a property. For most people buying a first home is a significant investment and helps safeguard them from buying a property with issues that might have financial cost implications. It may also give bargain power to lower the price.
18. Have an Appraisal from Rental Property Experts
A rental appraisal details what level of rent an investment property might generate. When the purpose of the property is used to generate income from rents, the income method of appraisal or valuation is most commonly used. The net income generated by the property is measured with certain other factors to calculate its value in the current market if it were to be sold.
The appraisal from Rental Property Experts includes accessing the property size, location of your property, Property inspection to look at the overall condition of your property and any upgrades, renovations and or new installations. Property Experts evaluate market conditions – current economic climate, property market indicators and similar properties in your area comparison.
19. Invest in the right location for Rental Properties
Invest in the right location for rental properties in an area that is stable or picking up steam. A city or locale where the population is growing and a revitalization plan is underway represents a potential investment opportunity. When choosing a profitable rental property, look for a location with low property taxes, a decent school district, and plenty of amenities, such as parks, malls, restaurants, and movie theatres. In addition, a neighbourhood with low crime rates, access to public transportation, and a growing job market may mean a larger pool of potential renters.
20. Audit the parking spot of Real Estate
Adding a single parking space to your home could see your property’s value soar by 5%. First-time rental property owners should seek out a property that has its own designated parking. When comparing two properties – one with the parking becomes more attractive for tenants and increases in rental value.
21. Talk to Neighbors to see the value of Property Neighborhood
Talking to Neighbors you can establish if the neighbourhood is going to add value if they can see the future of the neighbourhood by reverse engineering.
Is the neighbourhood planning to develop brand-new schools in that area? Is the neighbourhood close to highways, trains, or other transportation? Local amenities have a direct impact on real estate prices in the area to find out if there are any new developments planned.
22. Compare the Risks to the Rewards
Is investing in Rental Property worth the risk? The risks include when property management companies end up mismanaging your property leading to you sustaining losses in the form of negative cash flow. Unplanned monthly management fees and other charges including routine refurbishment or repairs.
Sometimes investors have no tenants to occupy their property, negative cash flow can lead to non-payment of mortgage instalments, and you can put your rental property in danger of foreclosure. If taxes and insurance components rise faster than your rental income. The rewards on the other hand of rental property investing let your own property without being actively involved in the process. The developer does all the renovation and the Property Management Company manages the property on your behalf, you can earn money while putting most of your time and energy into your regular job.
Unlike investing in stocks or other financial products that you cannot see or touch, real estate is a tangible physical asset. Rental income is not included as part of your income that’s subject to Social Security tax. There are various investment rental properties for beginners books with more risks vs rewards comparisons.
23. Create a Market Strategy for Selling the Rental Property
Individuals should set a goal of a 10% return. Estimate maintenance costs at 1% of the property value annually. Other costs include homeowner’s insurance, possible homeowner’s association fees, property taxes, monthly expenses such as pest control, and landscaping, along with regular maintenance expenses for repairs.
This information will guide investment property for beginners in Australia to calculate margins for property sales. The goal of real estate investing is to realize a sizable profit. Understanding the return on investment (ROI) concept and how to calculate it is critical to meeting that goal.
24. Have an Offline Advertisement in Property Place
What is offline Advertising? It’s marketing strategies or techniques that don’t require the use of the internet. The following ideas for offline advertising – Having a for sale board is still important, new paper ads and print material are still used to reach the widest audience possible.
25. Use online payment possibilities for Tenants
Some electronic payment options for tenants are as follows.
- ACH Electronic Transfer.
- Venmo.
- Zelle.
- Apple Pay.
- PayPal.
- Square.
- Online Rent Collection Services.
26. Buy Lower Cost Homes
The more expensive the home, the greater your ongoing expenses will be. Some experts recommend starting with a $150,000 home in an up-and-coming neighbourhood. In addition, experts advise never to buy the nicest house for sale on the block, ditto for the worst house on the block.
27. Understand the Rental Property Laws
Rental owners need to be familiar with the landlord-tenant laws in their state and locale. It’s important to understand, for example, your tenants’ rights and your obligations regarding security deposits, lease requirements, eviction rules, fair housing, and more to avoid legal hassles.