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If you’re about to take the dive into rental property investment, it’s smart to have a solid understanding of how to make the most bang for your buck. Here is our beginner’s guide to purchasing a rental property that meets your budget.
Getting creative to purchase a rental investment property
While you may think you’ve got a solid grasp on the market in your area, you may need to get creative to find a property that offers the right return on investment (ROI). It doesn’t need to be a multi-unit property that will pump six figures into your account each month (though that would certainly sweeten the deal). It’s also not as simple as finding a home with the lowest purchase price.
For example, a home priced at $300,000 that needs no repairs that you can rent for $3,000 a month could be a better deal than one for $200,000 needing repairs that you can rent for $1,800 per month.
Here are 6 steps to purchasing a rental property that meets your budget:
Note: it’s much better to embrace a conservative calculation of property expenses before you buy a property, even if it’s tough to stomach the lower profitability. Remember if you’re fooling yourself at this step, it’s only hurting yourself and your ROI.
Class A: Highly safe neighborhoods that attract low turnover, and homes that are mostly owner-occupied. Homes located in this type of neighborhood tend to be larger and are not typically the best rental investments.
Class B: Neighborhoods with mild turnover, mild vacancy rates, and working-class tenants. Often seen as the sweet spot for higher cash flow for rental investments, Class B homes may be in need of style updates and general upgrades. You might find you’re purchasing homes from people who have lived in them for 30 or 40 years.
Class C: Neighborhoods that attract high turnover, high vacancy rates, and may have higher crime. You’re often looking at a house flip or significant repairs when you invest in rental properties in a Class C neighborhood.
This breakdown is simply showing the very minimum you should charge to be within range of being profitable. As mentioned above, make sure you’re including things like closing fees, loan interest rates, and repairs in your total acquisition cost.
Finally, if you want to take it one step past beginner, you might wish to create a business plan for your rental property investments.
Using this beginner’s guide to purchasing a rental property, you too can set your sights on a piece of the real estate pie. Once you’ve reached step six and are ready to secure rental property financing, be sure to get in touch with the loan team at Truss.
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