Buying your first rental property is a great way to invest in your financial future. Take care of your property and you’ll see the value of it increase over the years. This increase in value has seen many savvy Australians continue to buy more rental properties in order to build their wealth.
But knowing where to begin can be hard to figure out. The timing has to be right. Invest in a rental property at the wrong time and you may end up suffering a financial loss. Buy the wrong property and you may end up forking out more money than you anticipated until it can become profitable for you.
It’s important to assess the potential risks and advantages to buying a rental property. By understanding what all of these are you can do a better job at weighing them up and comparing the two. It’s also important to understand what’s involved in maintaining a rental property. It’s not always smooth sailing when it comes to maintaining a house.
To help you make a more informed decision we’re sharing with you our top tips for buying your first rental property. Here we’ll cover all the important things you should consider before taking the plunge on buying a rental property.
Getting the location right
The suburb of your rental property can influence how your investment property will perform decades from now. Purchase a property in a declining area and you may find it hard to increase your rent and make it a valuable asset in the future. Pay attention to the local neighbourhood and see if the population is growing or if any plans are underway to revitalise the neighbourhood.
As you’re looking for different properties try suburbs with low property taxes, good schools, and plenty of amenities such as local parks, shopping centres, and restaurants. All of these can be signs of a thriving suburb. Low crime rates, easy access to public transport and a growing job market are also great things to look out for.
Avoid houses that need work
When a property is going for cheap it’s often too good to be true. It may seem easy to convert a run-down house into a profitable rental property. However, the cost of home improvement and renovations alone can make your rental property purchase very costly. So think about the extra commitment you’ll need to make when it comes to repairs.
So when you’re looking for a house that needs repairs, make sure you can afford them. Think about how long you can afford to own a house that you can’t rent out while repairs are taking place. Try adding up the costs of the repairs required. That way you’ll know how much you’re really paying for a fixer-upper.
Having a downpayment
Many people don’t realise how many differences there are between buying a rental property and owner-occupied property. The most important thing to note is that rental properties require a larger downpayment. Rental properties also require a more strict approval process.
For a home, you may only need to put down a 3% downpayment. A rental property can require a much higher percentage with a staggering 20% downpayment. This larger rate is due to the fact that you can’t get mortgage insurance with a rental property. However, you may be able to finance your downpayment through bank financing options like a personal loan.
Watch out for high-interest rates
Interest rates may have been low in 2020 but that’s no guarantee they won’t skyrocket in the near future. So it’s best to be prepared for any change in interest rates. Back yourself by saving up more for a deposit or having a financial safety cushion ready to go when interest rates increase.
So when you choose to finance your rental property purchase, choose a low mortgage payment. This will help to make your rental property more profitable. A low mortgage payment won’t eat into your monthly profits and help you pay off your mortgage sooner.
Consider landlord insurance
One of the most effective ways to protect your property investment is to take out landlord insurance. This type of insurance covers property damage, loss of rental income, and liability protection. The liability protection can cover the scenario in which a tenant or a visitor suffers an injury as a result of property maintenance issues.
To help make landlord insurance more affordable, some insurance providers tend to bundle it with a homeowner’s insurance policy. So don’t forget the additional costs associated with insurance.
Prepare for unexpected costs
When you’re purchasing a rental property it’s important to be prepared for the unexpected. The property may seem livable and profitable at first glance. Down the line, you may run into issues that can be expensive to fix. Ultimately you want to make sure you’re buying a property that won’t eat into your rental income.
There will always be the likelihood of an emergency which could instantly drain you of funds. Roof damage from a storm, burst water pipes, structural collapses can all become a costly barrier to you making a healthy rental income. One effective strategy is to put aside 20-30% or your rental income. These funds can be used for any unexpected repairs or maintenance that need to be performed on the house.
Calculate your potential operating expenses
Not everyone is prepared for the expenses involved with owning a rental property. One way to figure out if you can afford a rental property is to estimate what your operating income will be. Operating expenses can add up to between 35-80% of your gross operating income. If you charge $1,500 for rent and your expenses come in at around $500 per month, your operating expenses will be 30%.
So it’s best to establish how much your operating expenses will be before you commit to buying a rental property. It may give you more of an idea of exactly how soon you can start paying off that mortgage you have for the rental property.
Recognise your legal obligations
It’s important to understand what your legal obligations will be as a landlord. Laws can differ slightly depending on which state you’re in. This is something you should definitely consider if you’re thinking of buying a rental property in a state you’re not familiar with.
Make sure you understand your legal obligations when it comes to paying security deposits. Lease requirements, evictions, and fair housing. By having a clear understanding of your legal obligations you can help avoid any costly legal disputes.
Don’t let all the additional costs and responsibilities of buying your first rental property get you down. Once you realise the real cost of a rental property can start having more realistic expectations of what you can get and what you can achieve with them.
It’s always best to be more financially prepared. Save as much money as you can before you even think of seeing what’s out there. Never try and spend beyond your means. If you’ll only just get by with what you have then maybe it’s best to aim a little lower. Be smarter about your investment by choosing a rental property you can afford now and well into the future.