Buying a home to rent out – that is, purchasing an investment property – is no small undertaking. Any number of things can go wrong to ultimately make you lose money – vacancy, capital expenditures, poor due diligence, unforeseen acts of nature (in the form of huge storms, power grid failures, or pandemics, just to name a few!)
Still, real estate is typically a sound investment, especially when you consider that more people have become millionaires through real estate investing than by any other means. Purchasing a home to rent out is a great way to grow your net worth, but it’s not without its drawbacks. The key is to be aware of the potential risks so you can avoid them when you purchase.
Buying a rental property is something that requires a lot of research and preparation. More than half of us live in rental properties for at least a portion of our lives, so you have to make sure you’re buying the one that meets your needs.
Read on to find out how to buy a Boston home you intend to rent out.
Determine Whether You’re Really Cut Out to Be a Landlord
The first thing you should do before taking any other steps toward buying a Boston home to rent out is to sit down and take some time determining whether you are in fact cut out to be a landlord. It’s a job that comes with all kinds of headaches, and typically requires some handyman skills and experience. Property owners who have one or two homes often do their own repairs to save money.
So ask yourself these questions:
- Do you know your way around a toolbox?
- How are you at repairing drywall or unclogging a toilet?
- Are you comfortable hiring out work that you can’t (or shouldn’t) accomplish yourself?
How do you feel about a property managers, which will eat into your profits but is often a sound decision for landlords who own multiple properties and are looking to scale?
At the start, with a rental home, you really need a positive cash flow, and doing your own repairs and maintenance can help you make sure of that. But as you add more rental homes and increase your monthly rental income, you will probably want to hire this work done to have more time to manage your properties.
Find the Right Location for a Home to Rent Out
The next phase of buying a rental home involves finding the right location. You certainly don’t want to wind up with a rental in a decaying neighborhood or in an area with bleak economic prospects.
Location is one of the most important factors in deciding on a property to purchase as a rental investment during the current market conditions. When buying a Boston home you intend to rent out, look for a location with low property taxes, a decent school district, and plenty of amenities, such as parks, malls, restaurants, and movie theaters. In addition, a neighborhood with low crime rates, access to public transportation, and a growing job market with an excellent employment outlook may mean a larger pool of potential renters. These are the areas that will frequently command higher rents, greater cash flow, and good ROI.
Some of the things you should look for in the location where you want to buy a home to rent out include:
- A high demand for rentals
- Good prospects for positive cash flow
- Lenient rental laws and regulations
- Low price-to-rent ratio
- Safety and low crime
- Good schools
Do your research online – Check out comparable rentals on Craigslist and Apartments.com, research the towns on Census.gov and City-Data.com, and if you’re in the area, take a drive through the neighborhoods at various times during the day.
Find the Property and Conduct an Investment Property Analysis
After deciding on the area, the next step in the process is to find a property and then conduct an investment property analysis. After conducting your own research, you should lean on your real estate agent’s expertise to help you find the right rental property.
The next step that you absolutely cannot skip when buying a home to rent out is conducting an investment property analysis. Once you’ve identified a few properties that you think may be good real estate investments, it’s time for a more thorough analysis of each.
An investment property analysis involves reviewing and calculating the financial data on a real estate property. It’s a way of finding out whether the potential profits from your rental will outweigh costs, as well as determining each property’s overall risk level.
With an investment property analysis, you compare different investment properties, along with data attached to these properties, to compare and estimate how they will do once rented out. In this way, you will be sure to find the best investment property in the market of your choice.
The goal of investment property analysis is to decide whether the cash flow and net return will cover your monthly expenses. This is a critical step because it’s one of the main ways to determine that you have a profitable real estate investment on your hands. If you don’t complete an investment property analysis at each step, you could easily overlook something that could lead to massive problems down the road.
Carefully Consider Financing Options
Having found a promising property (or properties), you then need to carefully consider the financial end of the purchase. Typically, you will be purchasing a property with cash, or offering a down payment and financing the rest through a traditional mortgage program.
If you’re looking to buy a Boston home that you intend to rent out, and you’re fortunate enough to have plenty of cash on hand, you will have a competitive advantage against other buyers who will require financing. Further, you will be generating positive monthly cash flow right out of the gate since you won’t have a mortgage payment.
On the other hand, financing can give you a greater return on your cash when examining cash-on-cash return. For an investor who puts down 20% on a house, with compounding at 4% on the mortgage, after taking out operating expenses and additional interest, the earnings add up to roughly $5,580 per year. Cash flow is lower for the investor, but a 27.9% annual return on the $20,000 investment is much higher than the 9.5% earned by the cash buyer.
Which option is better for you depends on your investing goals. Call us at (617) 657-9811 to talk to a Boston agent at NextHome Titletown Real Estate who can help you plot this course.
Negotiate When Buying a Home to Rent Out
Many first-time investors buy fixer-upper properties, or at least ones that are priced low and sold as-is, and you’ll likely do the same. Just don’t be shy about negotiating a better deal simply because the property is already priced low.
Here’s what you should know about negotiating when buying a home to rent out – Remember to negotiate. The seller’s asking price is often not the price buyers end up paying. Sometimes it will be higher, and sometimes lower, depending upon the direction of the market.
There’s often room for negotiation. And most of the time that means relying on your agent’s negotiating expertise.
The process of buying a rental property is a different beast from buying a residential property to live in. We work with real estate investors all the time. For the assistance in buying a Boston home to rent out, contact us at NextHome Titletown Real Estate today at (617) 657-9811.
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