Property Investment 101: 7 Things to Know Before Becoming a Landlord

In 2021, American real estate investors snapped up properties to the value of $2.1 trillion, comprising over 40% of global sales.

There’s a high demand for rental properties at the moment, thanks to rising interest rates and high home prices putting paid to many home buyers’ aspirations. What’s more, the ongoing U.S. housing shortage means rental prices are currently high thanks to growing demand.

Are you tempted to dabble in real estate investments in light of these factors? Keep reading for a crash course in property investment 101.

1. Start Slowly

When you’re getting started in investment property, it’s best to make things easy for yourself. A turnkey property offers instant access to rental income without conducting expensive repairs first. Discover more information here.

Dealing with repairs, maintenance, and refurbishment belongs in the realm of experienced investors who can work out the cost pros and cons most accurately before they buy a property.

Investing in a run-down property might save you money at the outset, but it’s bound to cost you more in repairs, maintenance, and holding costs in the long term.

2. Consider the Location

Without renters, you’ll lose money on any investment property. So, it’s vital to ensure you can find tenants before you buy a property.

Look for up-and-coming areas with growing population numbers. Municipal revitalization plans are usually a sign of an area that’s bound to attract more residents soon.

Low crime rates, a growing job market, a low crime rate, and easy access to public transport are also attractive to tenants.

If you want to attract families, you should spend some time researching school district ratings. Other attractive amenities for renters include:

  • Parks
  • Biking and walking trails
  • Malls and shopping
  • Coffee shops and restaurants
  • Medical facilities

From an investment property owner’s perspective, an area with low property taxes, booming demand, and high rentals are all beneficial.

3. Property Investment is a Business

To succeed at being a landlord, you need to keep emotions out of the deal. Don’t develop personal relationships with your tenants, and never choose a property based on your subjective opinion.

Always conduct thorough research before investing in a building. For instance, don’t get your heart set on owning a house when condos are cheaper in your area of interest.

4.  How to Calculate Operating Expenses

At first, operating expenses on your rental property could be between 35% and 80% of your gross operating income. For instance, if you’re charging your tenants $1,500 per month, operating expenses of 40% amount to $600 monthly.

Most investors count on their operating costs being about 50% of the rental income.

Maintenance costs usually amount to 1% of the property’s value annually. Then you’ll still need to pay for HOA fees, pest control, cleaning, landscaping, and homeowners insurance.

To save money, you can ask your insurer to bundle your landlord insurance with your homeowner’s insurance policy.

You can count on a 10% ROI with an investment property eventually, although you might only benefit by about 6% at first.

5. Financing a Rental Property

Lenders have more stringent rules when it comes to applying for a mortgage on an investment property.

These strict underwriting standards mean you’ll need a better credit score, an excellent debt-to-income ratio, and be subject to a larger down payment than when you buy a residential property. With Credit Boost, you’ll be able to access lower interest rates for mortgages and better manage your cash flow.

You’ll need a minimum credit score of 620, but 740 or higher will get you better rates and terms.

The down payment on an investment property is in the region of 15% to 25%. Most primary residence sales require a down payment of just 3%.

The debt-to-income ratio refers to your monthly income vs how much you pay toward debt every month. In most cases, lenders will allow you to count 75% of your predicted rental income toward your DTI.

You’ll need at least three to six months of mortgage payments available in your bank account when you apply for a mortgage on an investment property.

6. Buy to Let Can Be Stressful

When you have tenants in your property, you’ll need to cater to their every whim. You’re responsible for maintenance and repairs to your property, so you might have to field calls at all hours dealing with flooding or other issues.

Plus, you’ll need to project manage any necessary repairs, which can eat into your free time and your profits.

There’s a good chance you’ll come across problematic tenants or bad payers at some stage of your investment property journey. This can lead to expensive evictions and even court proceedings if you unknowingly fall foul of current rental regulations.

As a new landlord, you may find the above factors make owning an investment property more trouble than it’s worth.

7. Consider Hiring a Property Manager

Hiring a property manager will cost you a monthly fee, plus any maintenance costs. Yet, most investment property owners choose this route to benefit from the long-term savings and peace of mind that go with it.

A property manager assists with finding tenants, vetting them, rent collections, and handling any tenant complaints or queries. They have long-standing relationships with a network of contractors, too.

This means you could benefit from better service and prices on maintenance than you would by going it alone. A property manager will also resolve minor repair issues before they escalate into expensive ones, thanks to regular property inspections.

Working with a property manager means you can own investment properties in the most lucrative rental areas, regardless of where you live.

Property Investment 101: The Golden Rule

If you take one thing away from this overview of property investment 101, it should be that you don’t need to navigate the process alone.

There are a wealth of investment advisors and experienced property managers around who can help you make profitable property decisions.

Would you like to investigate some more real estate basics? Browse our blog for the best ideas, information, and tips.

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