So you’ve already purchased a home. What’s next? A second home can be a great source of passive income by renting it out. You’ll be able to pay off the second mortgage you might need for purchasing your investment, then you can being to accrue returns. 

But starting off with a rental property investment can be daunting. There are many factors to consider before you begin to build your return on investment (ROI) with a successful rental. 

The investment process takes three stages of careful planning and forethought. As you plan, search, and finance your dream home, consider the following. 

Stage 1: Preparation

Preparing to invest in a rental property means education. It takes a thorough understanding of all your options before you can begin to search for the right home. Further, you should be ready with a comprehensive budget if you want to come out ahead quickly. 

The preparation stage requires research and forethought. Understand laws, taxes, and the costs associated with maintaining a rental if you hope to be successful. Below, we’ve listed additional information to help you get started.

Learn the laws: Every state has different laws that determine the tenant/landlord relationship. Understanding the laws in your locale is key to managing a successful property. For instance, if a tenant won’t pay their rent, some states require you to give them a certain amount of time before you file an eviction process. 

You need to understand all the laws and ordinances in the area before anything else. Avoiding a costly lawsuit can be as simple as doing your research and crafting an air-tight lease agreement. See a legal professional for assistance before implementing your own set of rules for your property.

Know your applicable taxes: Specific tax laws apply to rental properties. These vary from the usual property taxes, and can include a percentage of all income associated with the property. This doesn’t just mean rent. 

For every fee and charge you process through your property—from pet fees to late fees—you will need to pay a portion back in taxes. Every location is different, taking an amount specified in tax law at the state, county, or even city level. However, you may be eligible for deductions when it comes to tax time as well. 

Be prepared to record and inventory every single cost and revenue associated with your investment property. A successful rental means efficient record-keeping skills, so start sharpening up now.

Create a budget: Knowing your applicable taxes will help you with this part. A rental property comes with a wide variety of costs, and you need to make a plan now for how you will pay for each of them. 

Here are just a few of the expenses you will need to pay on top of closing costs and your monthly mortgage:

• Maintenance and home repair

• Any needed renovations

• Insurance payments 

• Homeowners association fees, if applicable

• Interest

• Travel costs

• Marketing expenses

• Rental vacancies

Before you jump into owning and running a rental property, have a plan for how you are going to pay for each and every one of these expenses. You never know what will come up, but by planning for the inevitable, you can help ensure that your rental nets you a good ROI.

Stage 2: Searching for the Right Property

For a successful rental investment, you need to find a property that suits your needs. In the case of most investors, this simply means finding a property in a market in which it will appreciate in value, growing as an asset as time goes on. 

First, you need to decide what kind of property you are looking to purchase. Generally, three types of rental properties are the most common. These are:

1. Single-family homes

2. Condos or townhouses 

3. Multi-family properties (like apartment buildings)

Each type of property comes with its own share of positives and negatives. For example, multi-family units might offer the highest returns, but will also cost the most in overhead. Single-family homes and condos can be easier to maintain, but offer less in return. 

Next, you need to determine the right market for your investment property. You want to find a location that is up-and-coming, where home values have proven to be on the rise with room for growth. The ideal market will appreciate the value of your investment, continually raising your ROI. 

Then, you need to check out individual neighborhood metrics. What are crime rates like? How good and how close are schools? Are vacancy rates high? Each of these factors will be something to consider as you move forward with your investment. 

Stage 3: Acquiring Financing

The final stage of starting your investment journey comes in acquiring financing that will work for your investment goals. Since investment financing doesn’t work the save as mortgage financing for a home you intend to occupy, you need to ensure your eligibility for borrowing through the following steps:

1. Build a downpayment of over 20%. To be eligible for financing on an investment property, you’ll need at least that. However, the more you can put down, the better.

2. Earn a credit score of over 620. Borrowing requirements are becoming increasingly stringent—especially after the COVID-19 pandemic. Be sure you are a good candidate for a loan through maintaining good credit. 

3. Explore all your financing options. This includes small lenders and even owner financing. You never know when you’ll find the best deal, so check around and compare quotes before committing.

With the right financing, you’ll be able to break into the black sooner rather than later. Studying all your options and becoming an ideal candidate for lending will help ensure you get a mortgage product that works for your ROI.

Final Thoughts

Starting out with a rental property is never easy. With a wide variety of factors to consider, making the right investment decision means conducting thorough prep-work, searching for the perfect property, and bargain-shopping mortgage products to get the best rate. 

Once you’ve completed all these stages, the real work has only just begun. Now you have a property to maintain and renters to keep happy. However, you are never alone. An experienced property management company can help get your investment off the ground and build the value of your assets.

For more information on real estate investment and property management, contact 208.properties.