When To Buy Your First Rental Property

Deciding to invest in your very first piece of rental real estate is the first step toward generating a passive income and creating long-term wealth. The journey to building wealth can be quite difficult and should not be taken lightly. Before investing your hard-earned cash into a rental property, a wise investor needs to have a plan. Having a well-mapped-out plan will help mitigate some of the risk.

Continue to read below to learn what elements should be included in your plan!

Identify the type of rental property you want to own 

The world of rental real estate is vast; there are a variety of properties that are up for grabs. From apartment buildings to trailer homes, investors have a wide range of choices when it comes to the types of properties that can be acquired. Given this fact, before diving into the wonderful world of rental real estate, it’s a must to know what type of property you want to acquire.

Couple embracing one another while looking at property.

Source: Getty Images

Pursue knowledge of the industry

Once a definite decision has been made about what type of property you want, the next step is to gain as much knowledge about that particular sector of the rental real estate industry. If you’re wondering what type of content to start consuming, this article might be a good place to start. Regardless of the type of rental property owner you decide to become, knowledge of the industry is a must!

Create a budget

Once you’ve gained some industry knowledge, the next step is to create a budget. The great thing about hopping into the rental real estate market is that your budget does not have to be big. When it comes to buying a rental property, you don’t have to buy the next feature for Netflix’s World’s Most Amazing Vacation Rentals. It’s fine to start small, like with a trailer or even a condo. 

Get preapproved for a loan for your investment property

After creating a budget, the next step of the plan is to try to get preapproved for an investment loan. Getting loan preapproval for your investment property may come with a bit more legwork, but the good news is that investors can explore several loan options. Investors can get conventional loans, hard money loans, private loans, or home equity loans. There are many options to explore, but don’t miss out on the important step of preapproval; it will help guide your purchasing decision. 

Start researching properties online

After being preapproved for a loan, the next step is to conduct an online search for properties within the investment budget. The search should be consistent with the goals of the first step of the plan.

Learn how to analyze a real estate deal

Additionally, learning how to analyze a real estate deal will help you on your real estate journey. Learning this skill will help you determine the difference between an expensive property and a valuable property. For investors, your eyes should always be laser focused on value — and learning how to analyze a real estate deal can help with that.

Analyzing a real estate deal can be quite a lengthy process, but the good news is you do not need to be a math wizard to figure out the steps. The process can also be quite lengthy, and you will find different versions of this process on the web. The version will also differ by property, so I will give you the short and general version here.

  1. The first step is to select a location and compile property information.
  2. Next, you will need to analyze the appreciation rates, a rental strategy, and target tenants within the chosen location.
  3. Then you will need to run a financial analysis and determine the net operating income.
  4. Analyze the return on investment.
  5. Determine the capitalization rate. 
  6. Run a comparative market analysis (CMA).

Like I said, this process can be quite lengthy. If you need support, Zillow has a free public database that investors can use to estimate the value of a home based on similar and recent sales in the market.

Ready to buy!

Once an analysis has been conducted, now may be a good time to contact a real estate agent because you are in good shape to purchase your first rental real estate property.

While following a roadmap may seem like a bit of a hassle, it will help guide you on the journey to owning your first piece of rental real estate. As the saying goes, if you don’t make a plan, you’re planning to fail!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.