5 Steps to Buying a Single-Family Home to Rent Out
Author: Gloria Russell
If real estate investing has been on your mind, perhaps you’re ready to think seriously about purchasing a single-family home to rent out for supplemental income. Indeed, there can be pitfalls, but the more you read and research, the better your chances of success. Owning a single-family home and renting to only one tenant family has its advantages, and these homes are usually easy to find with many choices on the market.
Once you have weighed the pros and cons of single-family homes or multi-family homes and decided to buy a single-family home, you’re ready to talk strategy. In this article, we’ll discuss 5 key items that will help you find the right house to purchase for an additional income stream without gaining a river of headaches to dampen your enthusiasm or drown your profits. Let’s get started.
Table of Contents:
1. Find the right location.
Remember the real estate mantra: location, location, location. Yes, the location makes a huge difference in determining whether the property is appealing to the renters you want to attract. Look for a location that is close to places of employment because you want renters who are employed! Finding renters with good work ethics and family values is a must for a new landlord.
The property should have convenient access to shopping, entertainment, schools, places of worship and family activities. Give some serious thought to the type of renter you want. What will be important to them? Once you’ve made a list of their possible requirements, you can look for properties that will be appealing to them. In all cases, choose a neighborhood that is safe and where it’s evident that homeowners take pride in their homes and yards.
When choosing neighborhoods, be sure you are making a wise choice for your own schedule. Life gets busy, and you’ll make many trips to the new property. There’s no need to waste time on the road or add traffic-related stress. You also want to feel comfortable while in the neighborhood because, even though you won’t be living there, you will be there often enough to check on things or make repairs.
2. Make projections for purchase and operating costs.
The key to successful investment properties is to buy below market value so the value increases immediately. Investments are intended to help provide housing for those wishing to rent and to provide you with additional cash flow. There’s no room for an emotional connection to the property. Look at it through the eyes of your accountant, and you’ll be pleased with the results. Know your numbers and make sure the investment will yield acceptable positive cash flow.
Also, a cushion of 6 months of expenses will help ensure that you can handle repairs or vacancies. Be sure to work out the numbers in advance with your accountant and tax advisor. When comparing price purchase and maintenance against profits, your advisors will help you set benchmarks for profitability and positive cash flow. You’ll know what price range to look for and how much you can afford to invest in improvements.
When analyzing finances, determine a price range that will work for you, depending on the financing you’ll need. Talk with realtors and do your own research to find purchase prices and average rents in the area. This, along with your own financial information, will help you find a price range that is manageable. Start with a lower-priced property and, after building your equity and financial statement, you can look for more expensive properties to build your real estate portfolio.
Talk with your insurance agent ahead of time to better understand the necessary coverage for a rental unit. Be sure your agent is experienced in home rental insurance. It’s important to obtain adequate property rental insurance to protect your investment and financial portfolio.
For buyers, it’s essential to understand how to make a credit score work for you, rather than against you. In this article, we’ll discuss your credit report and credit score and the basics of getting them to work for you.
3. Buy low and finance wisely.
One of the most important elements in affecting the future profitability of the property will be the purchase price. You must buy below market pricing and make reasonable projections for operating costs. Do your own calculations and then talk with your accountant to map out projected positive cash flow and profitability.
There are many online resources to help you gain a basic understanding of financing qualifications and cash flow. Use online mortgage payment calculators and debt to income ratio calculators. Your lending institution will look closely at your debt to income ratio to determine your level of risk based on debt and income.
If you can make it a cash sale, the process will be quicker, and you won’t have to worry about financing or payments. However, for most of us, financing will be needed. The good news is that there are many solid sources of financing. A good mortgage broker will help you find the best program for your financial situation and goals. If you don’t have a connection with a loan officer, ask trusted friends for their recommendations, check online reviews and ask for a personal meeting to discuss your needs. Interview several until you’re confident with your selection.
Financial institutions look at a wide variety of things when a customer applies for mortgage financing on a home. There are 3 main building blocks that create the foundation for a solid mortgage application. If any of these 3 building blocks are compromised, it can result in a less than desired type of financing or having to change your financing to allow you to proceed. The 3 main building blocks of a purchase or refinance request are: Credit score, debt-to-income ratio and down payment percentage.
4. Decide how to manage and maintain.
When buying for investment purposes, you need to calculate expenses, time commitment and necessary resources. If you are handy and have the time and inclination, you can do a lot of maintenance yourself. Some landlords look at it as a part-time job or hobby. They like fixing and remodeling, while others look at this as drudgery. If it’s drudgery for you, check on maintenance costs for handyman services and professional contractors that you might need.
When choosing a property, be sure to have it inspected by a professional so you understand the condition of the structure and can estimate future renovation and repair costs. You can make your own assessment, with the realtor’s help, to determine if it’s worth proceeding. Then include a contingency in your offer allowing you a home inspection—and a way out of the deal if a major problem is discovered.
If you have time and enjoy managing the property, you can save on management costs. You may have already learned a lot from owning your own home. You know what can go wrong and how to fix it. You know who to call when you can’t do it yourself. However, if this all sounds like a headache waiting to happen, you can find an experienced property manager who will take care of the details for you and report back regularly about issues, projects and pricing. Ask for recommendations and interview them to discuss your priorities and their processes and fees.
Property managers can also screen tenants and help with issues, complaints, rent collection and eviction. This can be the not-so-fun side of ownership. Be sure to think it through and take advantage of professional help as needed.
Once you’ve taken a serious look at the reality of rental ownership, you might be excited to get started or decide to take another path. If you’re still thinking that it’s a workable plan, here are 9 rules to live by.
5. Purchase and promote.
Once you have found the right location and property, make an offer. It’s a happy day when your offer is accepted, and an even happier day when the deal closes. Your realtor will see you through all of this with the added help of a title company to make sure you have clear title and that all paperwork and legalities are managed professionally. At the closing, you’ll receive the keys, and you can introduce yourself to your new incoming-producing property.
If you already have renters, you can get acquainted and reassure them that you will maintain the property for their safety and comfort. If the property is vacant, you can make necessary repairs or renovations and then market the home for new tenants. As soon as you purchase, you can let people know that you have invested in a single-family home and will soon have the property up for rent. Market it within your contact spheres and post ads on local marketing and social media channels.
You can accept the rent already established for the property, but make sure to research the current local rental rates. You may find that you can raise the rent and increase profits. It’s also wise to have a real estate attorney look over the lease or create a new one for you. Treat this like the business it is and establish the proper processes and procedures. You’ll be glad you did.
Finding the best location for you and your tenants is a critical step and warrants taking the time to get it right. It’s also important to carefully calculate financial outcomes including operating expenses, tax benefits, cash flow and profits. Finding experienced professionals will help you avoid the hassles and heartaches that can come with rushing into a project without enough information. Learning from their expertise will help you gain the perspective, knowledge and confidence in your final decision.
A key point to remember is to buy at an attractive price point (below market averages). You’ll gain an investment advantage from the start. After your purchase, you can continue learning by talking with other investors, landlords and property managers. Choose the management style that’s right for you and your lifestyle, and enlist qualified help when you need it. Your courage and diligence will provide good housing for renters and reward you with a long-term income stream.
If you have enjoyed this article and gained motivation to get started with your single-family home investing, please share it with a friend who might also benefit. Thank you and may you find the most profitable property and the best tenants for years of investment enjoyment.
As a rental property owner, you have a lot at stake. Carrying adequate insurance for rental properties is what ties it all together. You are offering a wonderful opportunity for renters to have a nice home without some of the typical responsibilities of being a homeowner. It also presents an equally appealing chance for you to create additional income and equity, and you need to guard against the possibility that it will negatively affect your emotional and financial situation.