10 Tips for Buying Long-Term Residential Rental Property

Rental real estate is a popular investment because it usually yields a healthy return over time, but there are a few things you need to consider before diving in. Let’s look at some of the best tips for buying residential rental property as an investment.

1. Understand That Rental Investments are Part of a Long-Term Investment Strategy

If you’re looking for a quick ROI, real estate shouldn’t be your go-to. Experts say it can take five to 10 years to recuperate your investment, depending on what you pay and how much work you put into the property.

Consider adding rental properties to your overall portfolio over time so you have a mix of investments, all with their own timeline for ROI.

2. Believe It: Location is Everything

The saying “location, location, location” rings true for property investors. You need to carefully consider where a property is located before investing.

You may find a property at a great price…but look into statistics on crime in the neighborhood. It may be difficult to rent a home in an area with a high crime rate.

Also, consider the proximity of the rental property to amenities like schools, grocery stores and public transportation. It’s features like these that you can use when listing the property to attract great renters.

3. Consider the Property Type

Rental properties can come in many forms: apartments, condos, townhomes, duplexes, or single-family homes. Many first-time investors start with apartments or condos and then add to their portfolio as funds allow.

Consider what kind of maintenance each property type will require. For example, an apartment likely wouldn’t require you to maintain a yard or the external features of the home, whereas a single-family home might require you (or the renter) to cut the grass and keep the garden in good shape.

It’s also important to consider how much work you want to put into a rental property. Do you want a turnkey property that’s ready to rent immediately, or would you rather spend less on the property and then fix it, either with a few cosmetic improvements or major renovations that will increase the rent you can ask for?

4. Only Buy What You Can Afford

This may seem like a no-brainer, but when taking out financing for a long-term rental property, there are several things you’ll need to factor in.

First, the price of the property. Next taxes and any other fees, like HOA fees. Then, if you’re renovating the home, you’ll need to add that to your overall cost. 

You aren’t guaranteed to have renters your first month of paying that mortgage, so make sure you can cover several months of the mortgage while you get set up. Also, be prepared to pay 20-30% as a down payment.

And overall, make sure you’re going to be able to afford the payment each month. It may be tempting to take out a larger loan just because you qualify for one, but a larger loan means a larger monthly payment. 

5. Figure Out Financing

If you can pay cash for the rental property, fantastic. If not, explore your financing options.

The better your credit score, the lower the interest rates you’ll qualify for. But don’t stop with the first lender you go to. Rates and terms can vary from one lender to another, so shop around first.

Know that some lenders may require you to have six months of mortgage payments in a reserve account if your tenants don’t pay you or you can’t afford to pay your mortgage, so plan ahead.

6. Learn Landlord/Tenant Laws

If you’re new to being a landlord, you’ll want to spend some time understanding what’s involved.

Each state has its own laws for rent increases, eviction processes, and privacy, so you’ll want to be well-versed on these before looking for your first tenant.

7. Consider How Involved You Want to Be

As the owner of the rental property, you have the option to be the one handling the day-to-day responsibilities of being a landlord. Your tenants will contact you when something breaks (like the water heater), and you’ll need to be on top of collecting rent each month. You may get calls at all hours of the day (and night).

On the other hand, you can hire a property manager to do the work for you. Once you have several rental properties in your investment portfolio, it can be smart to have someone handling this on your behalf, especially if you have other responsibilities that make it challenging for you to fully commit to being a landlord. Hiring a property manager will, however, eat into your profits.

8. Get Your Tenant Screening Process Together

Don’t wait until you need to find occupants to develop a process for finding quality tenants. Consider what you want from applicants; it’s standard to have an application requiring information on finances and income, as well as to do a background check. You may also want to check references, do a credit check, and verify income and employment. The more effort you put into screening a potential tenant, the more likely it is that you will find a tenant who will pay you on time each month and who will leave your property in the same condition they found it.

9. Work with a Real Estate Agent

Once you’re ready to start looking at properties, find a real estate agent who has experience finding rental properties. She may be able to tell you how much rent you can charge in a particular neighborhood, as well as what vacancy rates are. She may also have contacts that can get you access to properties that aren’t listed yet.

10. Calculate How Much You Can Ask for Rent

Naturally, you want to make sure that you’re getting more in rent from tenants than you’re paying in expenses. Start by seeing what other rentals in the area are going for. Renters will do the same, so you’ll want to make sure your rates are on par with what’s in the neighborhood.

Be sure to budget all your costs in the rental price. If you’re including utilities, get an average cost from the utility company so that even when tenants are blasting the heat or air, you don’t go in the hole to cover the cost. 

You’ll also need to have landlord insurance, so check the price of a policy before setting your rental rates. Factor in other expenses, including pest control, landscaping, repairs and maintenance, taxes, and the salary for a property manager, if you hire one.

Make sure to reserve 20-30% of what you get each month from the rental fee for unexpected expenses. If the air conditioning system shuts down in summer, the tenants aren’t going to wait for you to scrabble the money to cover the expense; you’ll need to be ready to pay for anything that comes up.

Final Thought 

Investing in long-term rental property can provide a healthy financial cushion over time. But because it’s such a long-term commitment, make sure you’re prepared to take on the responsibilities of being a landlord (or hiring a property manager) and be patient. It may take time for the dust to settle on this investment, but once you get the hang of it, you may want to expand your real estate portfolio and add more rental properties to it!