WorldExecutivesDigest.com | Checklist for First-Time Rental Investors | The first time investing in a rental can be the most exciting and terrifying experience of your life. You’ve finally come to the bend in the road where you’re capable of making this purchase. You’ve saved money, analyzed the market, and now it’s time to execute. If you’re a first-time rental investor—congratulations!
Below, you’ll find a checklist that will help you make a sound, reasonable, and lucrative investment.
- Evaluate the Advantages and Disadvantages
Despite our current circumstances, real estate has proven time and time again to be an optimal investment. Even now, during the pandemic, the market retains its foothold. But do you know the distinct advantages and disadvantages to owning a rental?
Let’s start with the pros:
- You can use the power of leverage to borrow capital
- It allots the potential for tax-free cash flow (when you deduct depreciation)
- You can defer your investment
- You can leverage the appreciation
- You can use the passive cash flow for retirement
Then, of course, there are always risks:
- Your assets are concentrated (tethered to the market)
- Tenants could cause problems and damages
- Property taxes are an added expense (particularly if the rental is not filled)
- It can be time-consuming if active involvement is needed
The reality is that you’re going to have to discern what type of rental investor you’re going to be. Will you be hiring a property management company to handle the day-to-day? Or will you be an active landlord? Essentially: what are the outcomes you want from your investment and how big of a role are you willing to play?
Create a list of pros and cons to ensure you’re investing for the right reasons.
- Get Pre-Approved
Being that you’re going to be taking on a mortgage, it’s always advised that you first receive a pre-approval prior to venturing into the market. Why? Because it will show you what you can or can’t afford.
You can then identify whether:
- You want a 15-year mortgage with favorable rates
- To tie your money up with a 30-year loan
- How much money you’re willing to pay for the down payment
Essentially, this will allow you to understand your standing amongst lenders. From there, you can make an effective rental investment decision.
- Set Your Intentions, Set Your Goals
As with any big decision in life, you need to set goals for your desired outcome. This means defining what’s extremely important to you prior to spending capital. A few things to consider include but are not limited to:
- Your budget – What’s your monetary threshold? You don’t want to accidentally over-leverage your first purchase. This will make it harder to continue expanding.
- Risk tolerance – How much risk are you willing to take on? Do you want a lower-yielding or higher-yielding first property? Often this comes down to a large monthly cash flow or greater market stability.
- Your home’s appreciation – Is appreciation a component to your investment? Do you just want to make passive income and maintain solid rent prices, or do you want to invest in a property you can make a margin on when you sell?
By defining what “success” means for your investment, you’ll create better visibility on the specific type of home to purchase.
- Vet Your Tenants Stringently
Your tenants can dictate your job’s ease and efficacy. A nightmare tenant can cause overhead issues, stress, and damages that come out of your pocket. A great tenant can eradicate the notion that landlords have any responsibilities at all.
Therefore, the screening process needs to be addressed and executed with the utmost meticulousness. For instance, do you know the many valid reasons to deny rental applications? Do you have a process in place to check for criminal history and credit integrity? What is the criteria you’re going to create for your specific property?
A few things to consider:
- What salary do you want your tenant to make, relative to the rent price?
- Are pets going to destroy the flooring, or are you ready for furry family members?
- Will you need a previous landlord reference?
- A professional reference?
- What FICO credit card rating gamut will be your threshold?
A respectful and responsible tenant is the primary ingredient for a happy landlord. Do not overlook this process.
Most importantly, Get Excited!
You’re on your way to making your first rental investment. This is a monumental moment in your life, one that will pay dividends in the future. Just remember to understand the pros and cons of the investment, test the “lending waters,” set your goals, and find a perfect tenant.
As a first-time rental investor, you have many more achievements yet. Just make sure you set the stage for a play that continues. Past your initial investment, the show must go on.