First Home Facts

Tips For Buying A Rental Property

Buying an investment property, such as a rental property, is different from buying a house you want to use as your primary residence. When buying a primary residence property, you should be focused on the best fit for you, while for a rental property, the return on investment is the main focus. This difference may look subtle, but it has far-reaching effects. Below are some of the tips you can use when buying new home real estate used for rentals.

Define Target Tenants

Before you invest in a rental property, you should decide which types of tenants you are targeting. You need to know whether you want to deal with retires, students, bachelors/bachelorettes, or tenants with families. You need to decide whether you are targeting low-income, middle-income, or high-income tenants. Defining your target tenants will help you narrow down on the type of properties on which to focus.

Expect High Mortgage Rates

Mortgage rates for investment properties are higher than those for primary residences, and rental property is an investment property. Mortgage providers consider investment properties as riskier than primary residences. For example, those who rely on rental income to pay their mortgage loans might default during periods of rental vacancies. This means the mortgage application process is also likely to be more stringent for you when buying an investment property as compared to a primary residence.

Prepare a Large Down Payment

The risk mentioned above also means that you need a bigger down payment for an investment property compared to a primary residence. For an investment property, you usually need a minimum of 20% down payment, though more is better. For a primary residence, you can get away with down payment rates lower than 20%.

Research HOA Rules

If you are buying a house that is part of a homeowners association (HOA), then you should declare your intentions upfront and find out if the HOA allows rentals. This is because HOA rules specify whether homeowners are allowed to rent out their properties and how many homeowners are allowed to do it. Otherwise, you can buy a condo only to find that you can't rent it out since the HOA has already met its limit for rentals.

Focus on Tenant Preferences

When buying a rental property, its best to focus on what your potential tenants want and not your personal preferences. Therefore, even if you like a single-family home, but condos are currently hot in your city, go with a condo. This applies to other factors such as the number of bedrooms, the size of the lots, and the floor designs, among other things people consider when looking for a house.