Many people have thought at one point in time about investing in real estate. And why not? It is not only a very lucrative business industry but also one of the biggest investments suggested by the wealthy:

Marshall Field said, “Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.”
Andrew Carnegie said, “Ninety percent of all millionaires become so through owning real estate.”
Robert T. Kiyosaki, author of “Rich Dad, Poor Dad”, said, “Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.”
Suze Orman said, “Owning a home is a keystone of wealth...both financial affluence and emotional security.”

Helpful Tips for Investing in Your First Rental Property

I could go on, but I think you get the idea. Investing in real estate can be the best move one can make financially. Personally, I tend to listen to wealthy people’s advice on how to get wealthy. I mean, they must know what they are talking about, right? These are just a few benefits of investing in real estate:

It is a passive income. Sure, you sometimes have to be active in it, especially at the beginning and end of a lease and if something goes wrong. For the most part, though, it can be pretty passive.
You are adding to your net worth. Physical assets are always excellent to have.
Once you get your feet wet, you can turn it into a full-time income. Some people enjoy renovating homes. After your income stabilizes from your rental properties, you can look into fixer-uppers that you can pour your passion into.

While it can be a very worthwhile investment, it can also go sideways, especially if you are new to the game. This guide is full of tips to help make your first rental property a successful endeavor.

Understand What Being A Landlord Means

Before buying your first rental property, you need to make sure you understand what this means. Take these into consideration:

If you take out a loan for the property, you are taking on a mortgage. If your property sits empty, you will be paying that mortgage out of your pocket instead of out of rental payments. You really need to determine if your current income could support that mortgage in the event that you are not receiving rent. Below you can take a look at today’s mortgage rates:

When things break or go wrong- as they inevitably will- you will have to get it fixed. This does not only mean that you will pay for it, either. This means that if a pipe bursts at 2 a.m. and your tenant calls, you have to get up and handle it. Are you willing to do that?

There is the process of advertising your first rental property, showing it, and vetting potential tenants. Do you have time for this in your current schedule?
Should your tenant not hold up their end of the lease, are you prepared to evict them?
Being a landlord is about more than finding your first rental property and collecting a check. It is important that you understand what you are getting into before you start.

Consider a Property Manager

Fortunately, you can buy your first rental property and hire a property manager to help you with the things you cannot do or just do not want to do. In fact, you can hire them to do everything. You could consider a company for this job or an individual. They can handle the 2 a.m. calls, collect the rent, advertise the property, vet the tenants, handle evictions and everything in between. If you cannot or do not want to be hands-on but still want to buy your first rental property, a property manager is the way to go.

Start With a Single Family Home

Many experts suggest sticking with single-family homes for the first rental property an investor purchases. This is because there is only one unit and one set of tenants to deal with in the beginning. It helps you ease your way into being a landlord rather than diving in head first.

Evaluate the Neighborhood

The property that you are considering purchasing is not the only thing you need to look at. You need to evaluate the surroundings as well. Is the neighborhood in good shape or is does it look run down? Does it look like the overall neighborhood value is improving (are there new houses being built or businesses being opened)? If the value of the neighborhood is not good, the value of the house is not going to matter much.

Be Familiar With It

It is a good idea to be familiar with the area in which you are purchasing your first rental property. I once rented a home from a man just getting into real estate. He lived in New York and the property was in Tennessee, which he knew nothing about. He had a property manager, but he insisted on being hands-on.

That’s not necessarily a bad thing. It’s just that he could not answer a single question I asked about the area. His lack of knowledge made him seem very inexperienced. With the wrong type of tenant, looking inexperienced could mean that they try to take advantage of you a lot. You do not have to be an expert. Just familiarize yourself with the area or, at the very least, be able to point out resources. Otherwise, let your property manager handle everything.

Create a Written Lease

A thorough written lease is very important. The lease should include things like when payments are due, how much payments are, any late fees or other fees, your pet policy, what the tenant is responsible for, and anything further that you expect from the tenant. Having a clear, written lease signed makes the process smoother, especially if you have to evict or take the tenants to court.

Accept Online Payments

Accepting rent payments online is a convenience for you and for your tenants. First, you are not having to wait around for your tenants to bring cash or for the check to come in the mail. This eliminates any excuses for late payments. It also eliminates your need to go to the bank.

Second, it means that your tenants have a little more flexibility on the time of day to pay you. For instance, if they work third shift and sleep during the day, it may be difficult for them to meet you before 5 p.m. Being able to pay online means that they can pay at 3 a.m. if they need to.

Learn From Other Landlords

The best place to learn is from someone who has hands-on experience. Look for some other landlords that can teach you the ins and outs and give you tips for success with your first rental property. It does not necessarily have to be in person, either. There is a group for pretty much anybody on Facebook, and the internet is full of experts. Take some time to learn from their experience.

Work Out Financing Early

Let’s talk money for a moment. Before you jump into a loan and a purchase, you need to think through the financing. How long do you want the term to be? What is the maximum amount you can afford to pay out of pocket monthly should you not receive rent? How much do you have to pay down on the property? Do you want an adjustable-rate mortgage or a fixed-rate mortgage?

All of this should be determined long before you start filling out loan applications. Buying your first rental property is a big deal, especially financially. You want to be smart about it, so think it all through. Then, go talk to lenders prior to looking at homes. The sooner you have the finances lined up, the easier things flow.

You also want to be sure you shop mortgage lenders just like you do other things. Do not just jump on the first thing you get approved for. It may get your the worst terms and the worst rates. The better move is to do some rate shopping through pre-qualifications from several lenders.

Fortunately, you do not have to go to several places to do this. Instead, shop mortgage lenders online. You can apply with several lenders at once so getting pre-qualifications can be easy. This is especially helpful for one very big reason: Any time you are applying for credit in the same industry, such as with mortgage lenders, you need to put all of your applications in within a two week period. Doing so minimizes the impact on your credit. If you wait any longer, it will result in additional hits on your credit. Since you can apply for several mortgage loans online at the same time, it is much easier to meet this two-week time limit than it is when you go to several places in person

Talk to Neighbors

When you find a home you are interested in for your first rental property, have a chat with the neighbors. Explain that you are considering purchasing the home and you just want to get any information they can share about the neighborhood, the potential rental itself, and the current tenants- if you are purchasing a property that has already been leased. Most of those people will be happy to help.

Have the Property Inspected

In this sense, your first rental property- and any after the first one- is no different from a home you are considering for yourself. You need to have it inspected before signing any paperwork. Think about it: What if there is a big issue that you discover after signing the papers? Now, you have to pay more cash out to fix the issue before you can even consider moving anyone in.

Get an Appraisal

Again, this is similar to you buying a home to live in. You do not want to pay out more than it is worth. Get a professional appraisal done. Most banks and mortgage companies require one, anyway. If they do not, though, you be sure you get it done yourself.

Look For a Home That is Ready to Rent

While fixer-uppers are definitely priced lower than other ones, having to renovate a home before you can rent it out is going to cost you. Most experts suggest sticking with move-in ready homes for the first rental property at least. If you like the idea of fixing up homes, you can still do that, but start with something you can make money on pretty quickly.

Get Personal Finances in Order First

Let’s just be clear: Getting a mortgage means adding debt to yourself. And, again, if the property is empty or your tenants just are not paying their rent, you still have to make that mortgage payment. If you are currently in some form of debt, will making the mortgage payment stop you from taking care of the other debt? If so, you might want to rethink it until you get your initial debt paid down.

Also, if you are about to be going through some type of life change, such as having a baby, sending kids off to college, or something similar, you should step back for a moment. It is usually better to wait until those changes occur and have settled a little bit before jumping into new debt.

Set the Monthly Rent Right

Experts suggest that the monthly rent amount should equal a minimum of 1 percent of the purchase price, but 2 percent is much better. This is to ensure that the rent will cover the mortgage payment. If you cannot charge at least 1 percent, this property is not a good investment.

Keep Cash Put Away

You do not want to be caught broke when your first rental property needs repairs. Notice I said when, not if. Things happen- that is just how it is. You do not want to have to go in further debt to fix a problem with the rental property. Keep at least a few months of cash away to pay for these problems. That way, if you do get a 2 a.m. call, you do not have to stress about how you will pay for the repairs.

Look For Mid Range Home and Neighborhood

For your first rental property, you should consider a mid-range home. What I mean by this is to look for a blue-collar neighborhood. There is typically less crime there, less renter turnover and so on. Choosing a home in either a really high priced area or a more run-down area can mean biting off more than you can chew for your first investment property.

Don’t get me wrong- those two types of areas can be lucrative. However, they are often more high maintenance areas with higher turnover, as mentioned above. This just makes them more difficult to manage when you are brand new to it. If you find a home in one of these areas that you want to invest in, do it, but you may want to let a property manager handle it until you have a little more experience.

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Pay Attention to Your Instincts

If you feel confident with your decision, go for it. If, however, your gut is telling you to back up for a minute, listen to it. Our subconscious has a way of picking up on things our conscious brains do not. This means while you are excited about the prospect of owning real estate and not seeing the whole picture, your subconscious brain is telling you something does not seem quite right.

Maybe the property you are looking at is not the right one. Maybe this is just not the right time. Maybe it is something totally different. Either way, take a step back and analyze the situation. Try to determine what does not feel right and then make a decision after you consider the problem.

Conclusion

I hope that this guide has helped you to consider your decision to invest in your first rental property on a deeper level. It can be a great move for you to make, but it is one that should be considered carefully- just like every other financial decision. As always, if you need help with your decision, seek the counsel of a financial advisor who can help you make an objective decision.

Helpful Tips for Investing in Your First Rental Property