How to Buy a Rental House

Purchasing rental property can be a great way to get income while owning property and building equity. However, just like in any investment deal, buying a rental house does not automatically mean getting a great return. To make a rental house a great investment, you need to find the right piece of property in the right location. Once you do this, you need to purchase the property for the right price. Finally, once the house has been purchased, you need to be prepared to be a landlord.

Part 1

Part 1 of 4:

Evaluating Rental Property

1
Analyze the benefits of owning a rental home. When you decide whether owning rental real estate is a good investment for you, weigh the advantages against the disadvantages in order to make an informed decision. The following are just some of the many advantages to owning a rental property:^{[1]XResearch source}
- Current income, which is the rent money you will pocket each month after the mortgage and other expenses have been paid.
- Appreciation, which is the increase in your home’s value over time.
- Leverage, which means that you can purchase the rental home with borrowed funds while only putting down a fraction of the money needed to buy. You control the entire property and the equity it holds while only paying a fraction of the cost.
- Tax advantages, which include possible deductions, tax-free money through refinancing, and tax-free exchanges if you sell your property and reinvest the money in other property.
2
Explore the downside of owning rental property. Buying a rental home can be a risky investment. This is particularly true if you do not do your homework and purchase property in a market that does not suit your needs. In general, rental property can expose you to the following:^{[2]XResearch source}
- Liability, which can occur when something bad happens to your tenants (i.e., a stair breaks and a tenant is injured). If you are sued, you will have to Defend Yourself in Court.
- Unexpected expenses, which occur all the time when you purchase property. While some issues can be easily fixed, if you have to replace a roof, wiring, or a foundation, you can quickly find yourself spending money instead of making it.
- Bad tenants can avoid paying rent, destroy a home, and sue you for damages.
- Vacancy, which means you can’t find a tenant and the house sits empty with no money coming in.
3
Examine the time commitment involved. Purchasing and maintaining a rental home is a lot of work. As a homebuyer, you will need to do a lot of research to ensure the investment you are making is as stable as possible. This means you will have to analyze markets, hire help, and make important financial decisions. In addition, as a landlord, you will constantly be required to be working with the property and its tenants in order to get the income you expect.
- Purchasing a home can take many months, if not years. Be prepared for this.
- Being a landlord can last a lifetime. Unless you delegate this task to someone else, you will be a landlord for as long as you own the property and rent it out.
4
Determine the strength of the rental market in your community. Before you make a huge investment in rental property, you need to make sure you are making a sound financial choice. On a general level, ask yourself whether your community has a robust market for rentals. For example, living in a college town where renting is the norm may offer you a better market than living in a small farming community where everyone owns their own home.
- Additionally, look at the number of listings and vacancies in the area where you are shopping. If there are a lot of them, it might signal that the market has gone bad.
- Consider the difficulty of getting the building permits you will need to enhance the property. If permits are prohibitively costly and difficult to get, you may not want to buy in that area.
- Analyze the average rental prices of units that are comparable to what you are looking at purchasing. After all, you need to be able to make money.^{[3]XResearch source}
5
Retain expert help. Purchasing a rental home means having to deal with real estate transactions, legal documents, and potentially even tax questions. For these reasons, it is important to hire expert help in order to make the best decisions possible. However, this help will cost you.
- To hire a real estate agent, contact your friends and family. You want to find someone that is both trustworthy and knowledgeable. The person you choose will be responsible for finding you a home that meets all your needs.
- To hire a lawyer, contact your state bar association’s lawyer referral service. After answering a few general questions, you will be put in touch with lawyers in your area. Hire someone who is comfortable with real estate transactions and rental law.
- To hire a tax expert, talk to friends and family that might have rental properties as well. You want to make sure that you are squeezing the most money out of your investment as possible. Accountants and other experts may be able to help you do this.
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Part 2

Part 2 of 4:

Locating and Inspecting Property

1
Determine what type of property you want. Rental property can come in any number of shapes and sizes. You can choose to buy condos, apartment buildings, or single-family homes. If you are interested in single-family homes, consider what type of home you want to look for.
- Maybe you want a big yard that will attract families.
- Think about a modern home that will attract high-income residents.
- Consider a more modest home that will attract college students and young adults.
Before you go to your bank to find out how much you can afford, gather the documents the lender will use to make that determination. In general, you will need to show some proof of income, proof of assets, a good credit history, verified employment, and identifying documents (e.g., a driver’s license and Social Security card).^{[4]XResearch source}
3
Find out how much you can afford. Before shopping for a home, you need to know what you can afford. To do this, go to your local bank and get pre-approved for a home loan. When you talk with your bank, you will be able to discuss different loan options and their benefits (e.g., adjustable rate vs. fixed rate loans). Additionally, the lender will check your credit and alert you to any problems there may be.
- Work with the lender to determine the maximum you will be able to borrow. This will give you an idea of how much you can spend on the home.
- After going through the process with the lender, get a pre-approval letter that you can show to sellers. Sellers will be more willing to negotiate with buyers that have their finances in order. By showing a seller a pre-approval letter, you are reassuring them that you can afford the house they are selling.^{[5]XResearch source}
4
Research neighborhoods in your community. Once you know how much home you can afford, start working with your real estate agent on finding the best homes available. Talk to your real estate agent about what you are looking to get out of the property. Let him or her know that you plan on renting. In addition, sit down with your agent and discuss the following:^{[6]XResearch source}
- The makeup of different neighborhoods in your community. For example, if you are close to the local college campus, your tenant pool is likely to be mostly students. In addition, this location will likely lead to regular vacancies during the summer months when school is not in session.
- Property taxes. You want to make sure you keep your overhead costs as low as possible. Try to find a location with reasonable property taxes.
- Schools. If you plan on having families as tenants, you will want to be in a neighborhood with a quality school system.
- Crime. Nobody wants to rent a house in a dangerous location.
- Job market. Your tenants will most likely need to work in order to pay the rent. Help them by purchasing a home in an area with a quality job market.
- Amenities. Tenants will be more likely to rent your home if there are things to do in the community. Look for homes near parks, hiking trails, movie theaters, and restaurants.
5
Choose the right property. Now that your agent has an idea of what you are looking for, he or she will use their resources to compile a list of homes you might be interested in. When checking out these listings, visit each house and view it through your landlord eyes. When walking through each house, consider how many bedrooms and bathrooms the house has, how many square feet it is, how big the kitchen is, and the size of the yard.^{[7]XResearch source}
- When you and your agent settle on the perfect house, dive a little deeper and have an inspection done. Before you make any offer, you need to make sure the home is in the appropriate condition.^{[8]XResearch source}
- Make sure the inspector looks at the foundation, roof, wiring, building material, structural strength, and anything else you might think is important.
6
Estimate cash flow and investment return. Before you make an offer on any home, you want to determine whether the home is likely to be a good investment for you. To do this, you need to estimate the cash flow you will receive from the property after you buy it. Cash flow is calculated by estimating the average rent you believe you could get for the home and subtract all the monthly expenses from that number (e.g., the mortgage payment, property taxes, insurance costs, maintenance, and repairs). If the number you get is positive, you should consider purchasing the property. However, if the number you get is negative, the property will likely cost more than it makes you.^{[9]XResearch source}
- For example, assume the average rent for your potential home is $2,000 per month. Further assume your mortgage payment is $900 per month, you pay $140 per moth in property taxes, $200 per month in insurance costs, and an average of $400 per month in maintenance and repair fees. In this scenario, your estimated cash flow would be +$360 ($2,000 - $1,640).
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Part 3

Part 3 of 4:

Purchasing the Rental House

Now that you have found the perfect home, you and your agent need to agree on an initial offer to make. Generally, your initial offer should be about 5% below the asking price. In addition to using this rule of thumb, ask your agent if he or she has any comparables in the area so you can see what other houses have sold for recently.^{[10]XResearch source}
2
Negotiate with the seller. The seller will likely make a counter offer to your initial offer. Be prepared to negotiate with the seller. While most sellers price their home above its value, he or she will still want to get the most money as possible for the home. Find an agreeable number somewhere, if possible.^{[11]XResearch source}
- If you can agree on a price with the seller you will move forward.
- However, sometimes you and the seller will not be able to agree. If this happens, you will have to move on and look for another home.
If you have agreed on a price, you will usually need to make an earnest money deposit as a sign of good faith.^{[12]XResearch source} An earnest money deposit is a payment made to the seller to show that you are serious about purchasing the property. Depending on the circumstances, the deposit may become a part of the down payment if the offer is accepted, or returned to you if the offer is rejected. In some circumstances, an agreement may state the deposit will be forfeited if you pull out of the deal.^{[13]XResearch source}
4
Close the deal. The day before closing you will need to gather all of the necessary documents needed to close the deal and make sure everyone involved will be at the closing. You will usually need to bring loan documents, purchase and sale agreements, proof of title searches, proof of insurance, home appraisal documents, and inspection documents. On the day of closing, you, your lender, your agent, your lawyer, the seller, and the seller’s team should all be present.
- At closing you will sign two major documents. First you will sign the mortgage note with your lender in order to finalize the loan. Second you will sign the purchase and sale agreement, which will transfer ownership of the property into your name.
- At the end of closing you will ay the seller for the property and the deal will be finalized.^{[14]XResearch source}
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Part 4

Part 4 of 4:

Being a Landlord

As soon as you are able, get into the house and make sure everything is ready to be rented. Start by having the property inspected to make sure there are no dangers or unexpected problems that need to be fixed.^{[15]XResearch source} Everything needs to be in the best condition possible to ensure you attract the best tenants and get the most out of the property.
When you are ready, list your property on the rental market. Put a sign in the front of the house, use rental websites, and use rental agencies. All of these avenues will help you get your home rented quickly. In addition, consider joining a landlords’ association in your area. These associations will help you through the rental process and will provide a lot of resources.^{[16]XResearch source}
3
Scrutinize possible tenants. When a tenant confronts you about renting your property, have them fill out a lease application. The lease application should require the prospective tenants to provide you with personal information, financial information, references, and other information you can use to help make a decision about who to rent to. Do not rush during this process. It is better to go slow and get it right than it is to get a bad tenant quickly.
- Make sure you call references and talk with them about the prospective tenants.
- Run credit checks on everyone looking to rent. Make sure they have the financial ability to consistently pay the rent.
- Drive by the prospective tenant’s current living space as that will give you an idea of how they will treat your home.^{[17]XResearch source}
4
Sign a lease agreement. When you are ready, call the best candidates back and let them know you would like to rent to them. Find a time for everyone to get together to sign the lease. If you have a lawyer, have them draft the lease for you. If you are a part of a landlords’ association, see if they have any model leases you can use.
- Regardless, make sure your leases are legal. If you do end up litigating with a tenant, you want to make sure your lease will hold up in court.^{[18]XResearch source}
5
Be there for your tenants. Throughout the lease period, make sure you are available and present for your tenants. A strong landlord presence will help ensure that tenants do not trash the home or skip out on rent. With that said, by law, you do need to give them some privacy. Do not come to the house unannounced and do not watch over them all the time.
- Make sure you return phone calls and take care of repair orders in a prompt and professional manner.
- Work with tenants on rent and late payments, as much as possible, to try and keep a friendly relationship. If tenants do not like you they will be more likely to trash the home and skip out on rent.
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