Buying a Second Home to Rent: Dos and Don’ts

Author: Jennifer McLean Mortgages |

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If you have been thinking of buying rental properties, here is one thing you should know.

Like any business, it is vital to know what you are getting into before investing in properties. If you know where problems are likely to occur in your real estate investment plan, you will be more prepared to avoid them.

As a budding property investor, what are the things to do or not do when buying your second rental property?

 

Do’s of buying rental properties

 

  1. Choose the right location

One of the most crucial factors for the success of a rental property is the neighborhood. What are the signs of a potentially promising location?

  • The presence of several employers (good job trends)
  • Strong population growth
  • Low crime rates
  • Proximity to a college or entertainment & shopping centers
  • Multimodal transport
  • Good school districts
  • Low price to rent ratio

 

  1. Decide your investment strategy

There are different strategies for investing in real estate, but for investors who focus on rental properties, the options are:

  • House hacking
  • Live-in-then-rent
  • BRRRR (buy-rehab-rent-refinance-repeat)
  • Live-in-flip
  • Short-term buy and hold
  • Long-term buy and hold

The best strategy will depend on your skill level, available time, capital, and overall objectives.

 

  1. Think of the kind of property you want to buy

There are several types of rental properties to invest in, each with the specific market it targets and its peculiar challenges. The two broad categories are residential and commercial properties. For residential properties, there are single-family homes, multi-family homes, apartments, condos, student housing, and more.

 

  1. Shop around for financing options

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Lenders may have good deals going on, but they will not always tell you about them. Mortgage brokers not only know of these deals but can help you compare with other lenders and negotiate the best terms. Most brokers will not charge you for this. In addition to conventional financing or investing options, check out other options like crowd funding and Real Estate Investment Trusts REITs.

 

  1. Learn about tenant laws in your city

Landlord-tenant relationships are highly regulated. Some laws relate to requirements for rental properties, while others deal with issues that pose a threat to the people in your rental. Knowing these laws will save you from a ton of trouble with the authorities and possible lawsuits by tenants.

 

  1. Assemble a team of experts

Every step of the process of buying, maintaining, and operating a rental property has its pitfalls. If you have people who know how to negotiate those pitfalls by your side, they can help you succeed a lot faster. Some of the experts who should be your team members include:

  • Mortgage broker
  • Tax accountant
  • Attorney
  • Maintenance person

 

  1. Understand your responsibilities as a landlord

Rental property is not a fully passive source of income; it requires a lot of work. Some of your responsibilities as a landlord are:

  • Advertise vacant units
  • Screen potential tenants
  • Do timely maintenance or repairs
  • Collect rent on time
  • Maintain financial records for the property
  • Attend to tenants’ complaints promptly
  • File tax returns

 

  1. Take advantage of tax benefits

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Many of the expenses for a rental property are tax-deductible. If you don’t know which expenditure to deduct before paying taxes, you will give money to the government that should go into your pocket. A competent tax accountant who understands real estate investing can help you with this.

 

Don’ts of buying rental properties

 

  1. Don’t neglect the math

Before you commit to buying a property, know the potential income from it and your projected expenses. Usually, your annual maintenance cost should not exceed 1% of the purchase price of the home or $1 per square foot of the property. The gross monthly income from the property should be 1%-2% of the purchase price.

 

  1. Don’t buy cheap in a bad area

If you find a nice property that looks like a great deal, but it is in a bad location, do not buy it. It is better to buy a not-so-hot property in a good neighborhood where you are sure of a steady flow of tenants into the home. Rental properties in a terrible location may not generate enough income to justify the investment.

 

  1. Don’t start big

Buy a low-budget home in a decent area to learn the ropes of how to manage a rental property. No amount of research will prepare you for the reality of dealing with tenants or the other stresses of managing a property. If you can afford a $750K rental, buy a property that is around $450k. That way, you don’t overexpose yourself.

 

  1. Don’t underestimate the time involved

Overseeing the operations of rental property requires significant time investment on your part. It would be best if you make time to meet with prospective tenants and do background checks on them. Take out time to do maintenance and other things. If time is going to be an issue, consider hiring a property manager.



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