Buying a rental property can be a great investment. It allows you to build wealth, leverage passive income, and enjoy a greater degree of financial freedom that you wouldn’t otherwise have. But it’s not for everyone, and it isn’t always easy. Buying the right rental can seem tricky if you don’t know what you’re doing (or if this is your first time). You’ll need to understand what makes up “good” real estate investment opportunities before jumping in headfirst with little or no experience under your belt—so let’s get started!
Benefits of Buying Rental Properties
If you’re an aspiring landlord, the benefits of owning an income property are endless. Here are some of the most common pros of investing in properties:
- Passive Income: Owning rental properties is one of the best ways to build passive income. As long as you have a good property manager and well-vetted tenants who pay on time, your investment will continue to earn money for you even when you’re not around.
- Wealth-Building Equity: As your rental properties increase in value over time, you’ll have the opportunity to leverage that equity to borrow against it for other investments. This is how many people build their wealth—by leveraging their assets!
- Tax Benefits: Owning rental properties can also help you save on taxes. In many cases, the taxable income from your rental property can be GREATLY decreased through write-offs like depreciation. You’ll also be able to write off certain expenses like repairs, mortgage interest, and maintenance—which means more money in your pocket each year!
- Financial Autonomy: Owning rental properties can help you build financial independence. As your portfolio grows, the amount of income generated by those properties will increase and can be used to fund other ventures or spend on the things that matter most to you.
Risks of Buying Rental Properties
Buying a rental property doesn’t come without risks, and you’ll need to be prepared to encounter a few of these when you start your passive income journey:
- Steep Learning Curve: Even if you’re a savvy investor, buying rental properties can be a big challenge. You’ll need to learn about the market and how it works, find great deals on good properties, manage tenants and property maintenance—and then repeat this process over and over again.
- Legal Liabilities: As an owner, you will be legally responsible for any property damage or injuries that happen in your rental. If a tenant is injured on the premises, you could end up paying for medical bills and other costs associated with the accident. These costs can add up quickly, so have plenty of insurance coverage on your rental (and maybe even an umbrella policy)!
- Illiquidity: If you want to sell your rental property, there may be a delay in getting the cash. You’ll need to find a buyer, negotiate with them on price and terms, complete any necessary repairs or improvements, and then finally close the sale. This process can take months—or even years!
- High Upfront Cost: Rental properties can be expensive to buy, maintain, and repair. You’ll need money for the down payment plus additional funds to cover operating costs while you wait for your investment to pay off. This can be a significant financial burden for anyone with little or no cash reserves.
How to Buy a Rental Property in 6 Steps
If we haven’t scared you off with the risks of rental property investing, you’re ready to plan your first purchase. Here are the six steps any aspiring investor MUST follow to buy a rental:
Research the Market
The first step is to research the market. This will help you understand what properties are available, how much they cost, and what income they generate. You can do this by talking with real estate agents specializing in rentals, networking with other investors, or attending open houses in your area.
Get Financing
The next step is to get financing. If you’re paying all cash, this won’t be an issue, but most investors choose to finance their properties using a mortgage. Getting pre-approved for a loan will allow you to know what you can and, more importantly, can’t afford. Speak with a mortgage broker or lender at your current bank to see what options they have for real estate investors.
Run the Numbers
Once you have an idea of what you can afford, run the numbers on some houses! Use a rental property calculator to determine how much you’ll need to charge to meet your mortgage payments and other expenses. If the numbers don’t add up, consider lowering your offer price or looking for properties in more affordable areas.
If you need help analyzing a rental property, check out our rental property analysis guide!
Hire an Inspector
Hire an inspector to check out the property and give you a detailed report on its condition. This is one of the most important steps when buying a rental property, as it can save you from making costly repairs down the road. A good inspector will also help you understand what’s wrong with the house and how much it will cost to fix—which can also be helpful when negotiating your offer price.
Negotiate
When negotiating, it’s important to remember that you’re not just haggling over the price of a house. You’re also negotiating for repairs, closing costs, and other fees. If you’re buying a house from an owner who lives in another state or country, then there’s no way for them to inspect your home inspection report—which means they won’t know what issues were found unless you tell them yourself.
Close on Your Rental!
After you’ve done the research, made an offer, and negotiated a purchase agreement, it’s time to close on your rental! Once you’ve signed all the paperwork and paid your closing costs and down payment, your property will officially belong to you! Now the real work begins!
6 Tips for Buying Rental Property
Now you have all the steps to get your first investment property in the bag! Here’s how the make the process even MORE efficient:
1. Have a Savvy Real Estate Agent
The first step in buying your first investment property is to find a savvy real estate agent. A good real estate agent can help you navigate the process of purchasing, managing, and selling your rental property—while educating you on what does and doesn’t work. Plus, they’ll know all the ins and outs of the market where you’re looking for properties. Of course, the best investor-friendly real estate agents are the ones that own rentals already!
2. Get a Thorough Inspection
It’s crucial that you get a thorough inspection of your first investment property right off the bat. This will help you avoid costly repairs and ensure that any problems with the property are discovered before you buy it. A good inspector will find mold, foundation problems, leaks, and other hazards, so you can use these repairs as a negotiation tool! ALWAYS get an inspection, ESPECIALLY if you invest out of state!
3. Know the Numbers
One of the most important things you can do is to understand the numbers. This means knowing how much rent your property will generate and what expenses come along with it (property management, taxes, maintenance, pest control, etc.). You also MUST know which metrics point to a good deal. We’re talking about calculating cash flow, gross rent multiplier (GRM), ROI (return on investment), and more. Know your threshold for profit and STICK TO IT!
4. Have a Safety Reserve
As a real estate investor, you should always have a safety reserve. This is the amount of money you set aside for unexpected repairs, vacancies, and other expenses. Having a reserve in place is essential because otherwise, you could end up with a problem on your hands and no way to fix it!
5. Understand the Benefit of Debt
Debt is a powerful tool for real estate investors. It allows you to use other people’s money to buy a property and grow your portfolio quickly. I learned the hard way that paying cash is NOT the best option, as I could have bought three times the rentals if I leveraged a bank for a mortgage!
6. Learn How to Be a Good Landlord
Landlords are not born; they are made. And it takes time and effort to learn how to be a good one. If you feel you have what it takes to manage your properties with integrity, responsibility, and respect for your tenants, then self-management may be for you. But, if you don’t have the time (or will) to run your properties, consider hiring a property management company.
Alternatives to Buying a Rental Property
If you’re looking to dip your toe into long-term rental property investing, or are just looking for another way to make money with real estate, check out these other investment vehicles:
- House Hacking: House hacking is when you buy a property and rent out unused rooms or units to help cover the mortgage. This is one of the BEST ways to get started in real estate with VERY little money down!
- Airbnb Arbitrage: Airbnb arbitrage (also rental arbitrage or real estate arbitrage) allows you to invest in real estate WITHOUT owning a property. You find a suitable rental that could work on Airbnb, rent it, and sublease it on Airbnb. Just make sure you have the owner’s permission before you do so!
- REITs (Real Estate Investment Trusts): Real estate investment trusts are one of the easiest ways to invest in real estate with little money. You can buy shares in a REIT fund that invests in properties, and you collect a dividend every quarter! There are many types of REITs (residential, commercial, industrial), so be sure to research which ones are best for your situation.
- Commercial Real Estate: Commercial real estate includes self-storage, large multifamily properties, retail centers, warehouses, etc. If you want to make more money and would rather deal with businesses than individuals, commercial real estate is the way to go!
- Short-Term Rentals: Short-term rentals (Airbnbs, VRBOs) are the cash cows of real estate investing. If you have a rental property or live in a vacation destination, you can rent your property out nightly for a BIG payday!
- House Flipping: House flipping is a common way to make money in real estate. It’s when you buy, renovate, and sell a property for a profit. This requires MUCH more time and money than a rental, but it could be worth the risk!
The Bottom Line on Buying Rental Properties
Buying rental properties is a great way to diversify your investment portfolio and earn passive income. For now, you should have everything you need to get your first deal done. If you want to learn how to become a master at rental property management, check out our list of the best property management software!
Buying Rental Properties FAQs
Still got some questions before you buy your first rental? Read on!
The 2% Rule is a VERY outdated rule of thumb for how much cash flow you should expect from your rental property. It says you should try buying properties where the monthly rent equals at least 2% of the purchase price. That rule may have worked in 2012, but it definitely doesn’t anymore!
Yes, buying rentals can make you rich, but it’s not a get-rich-quick scheme. You need to put in the work and be patient! It takes time to build up your portfolio and make it profitable. So focus on building a scalable portfolio, not just buying a single rental property!
You need to have enough money in the bank to cover a down payment and closing costs. How much that depends on the home’s cost and what type of financing you’re using. But it’s usually around 15% to 25% of the purchase price. Remember to always keep a safety reserve of cash as well!
Short-term rentals, like Airbnbs, tend to be the most profitable single-family rental properties. But bigger investments like apartment complexes, self-storage facilities, and industrial warehouses can also be cash cows!
