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When to Invest in Rental Properties
You want to know how long it can take for you to start your rental investing journey! The trick to start investing in real estate is that “it depends”.
In this article, I will guide you through multiple determining factors that can help you decide how soon to purchase your first (or next) rental property!
The factors you must take into consideration regarding how soon to buy a rental property are as follows:
- Purchase Price
- Neighborhood
- Downpayment
- Maintenance fees and costs
- Cash Reserves
- Operational expenses
How Long Does It Take to Invest?
The big question I get from new rental investors is “How long can it take before I am ready to invest in real estate?”
Let’s first dive into figuring out what types of expenses you need to have set aside before you get your first property. This can help you to ensure the least amount of risk and to make sure that it ends up being a good investment.
There are five major expense categories that you need to consider when you want to buy a property:
1. Purchase Price
You need to first consider the purchase price. This amount changes drastically depending on where you live, right? You can live in San Francisco or you can live out in the Midwest, and the housing market is very different in regard to cost.
2. Neighborhoods
It is always recommended that you begin looking at different neighborhoods in different areas around you. Whether you use DealCheck, or Zillow, for example, apps like these can help you to understand the prices of the types of properties that you want to look at.
Check out this article to learn about how types of neighborhoods can affect your rental units
3. Downpayment
You need to also consider the downpayment for your future real estate investment.
Different types of loans require different down payments. There are certain loans where you put 3% down and there are loans where you put 20%+ down.
Just consider that if you were to purchase a rental investment at $150,000, putting down 3% is a significantly different number than putting down 20%.
The key with this is to really determine a range of how much money you’re comfortable with setting aside, because how much money you need will play a large part in determining how long it will take to funds to be able to start investing!
4. Repairs and Maintenance
The fourth factor to consider is the potential for repairs and maintenance.
This is because most investors don’t just buy a rental property, move on with life, and start accumulating money.
There are typically a handful of repairs and almost always maintenance that has to be done prior to a tenant moving in and you collecting rent. The way people begin preparing for this is by creating a separate bank account for their rental units, putting funds into it every month and establishing what is called emergency funds and sinking funds.
These are important to start early in order to prevent unexpected costs once you purchase a rental property.
5. Cash Reserves
Having cash reserves is another factor to consider prior to purchasing a rental property!
Many banks, prior to loaning you out money for your rental investment, like to see cash reserves. Typically this can be up to 6 months of money that will be able to cover the mortgage in case you are not able to rent out your unit(s) as soon as possible.
6. Additional Costs to Prepare For
Here are some additional costs that new rental investors should prepare for prior to purchasing a rental property.
- Escrow
- Additional closing fees at signing
- Home inspection
Should I Pay Off Debt Before Investing In Real Estate?
If you haven’t paid off your debt, that could potentially still set you aside in regard to how much money you can set aside for a rental property. This can affect how quickly you can accumulate a downpayment and cash reserves.
Many gurus in rental investing advise that it is best to pay off personal debt first and then get to rental investing. Everyone’s situation is different but this can expedite your success far quicker than when paying off loans for years.
Should I Have Good Credit Before Investing In Real Estate?
If you want to get loans to purchase your future rental properties, you need to consider what your credit is.
Raising a credit score can take many months. This article goes over how to raise your credit score in order to buy a rental property!
Should I Have An Emergency Fund Before Investing In Real Estate?
Emergency funds and sinking funds are essential for running a smooth rental investing business.
Let’s be honest, we have all heard of the random, terrible things that could happen with owning a rental property.
There are also many operational expenses and maintenance fees that can be put into an emergency fund or sinking fund to avoid surprises.
If you’re unfamiliar with how budgeting and debt payoff works, emergency funds are essentially money that you put aside specifically for emergencies that you don’t touch, except for emergencies!
A sinking fund is money set aside for expected expenses. These can include regular maintenance costs or a new roof every decade, or example.
How Long Do I Wait Before Buying A Rental Property?
Throughout this article you have been exposed to quite a few different accounts, fees, costs, and expenses that you should be aware of prior to purchasing a rental property.
The point of this is to help you recognize the importance of preparedness, compared to rushing into buying a rental property.
There may also be additional costs you’ll encounter. This can include marketing and advertising, taxes, insurance, utilities, trash, maintenance, repairs, management, landscaping, legal fees, accounting, snow removal, and pest removal.
This is a lot to wrap your head around!
Reason being, it is not just about accumulating the money for the down payment. There are many other small costs that are involved with buying a rental property.
To go from here, first realize that everyone brings in different income and has different expenses in their lives already. Additionally, everyone will be looking at properties of drastically different pricing.
With this in mind, getting started really depends on the numbers! I highly recommend you explore the DealCheck app to do your research and property analysis, because they have some amazing rental property calculators that will help you determine many of the numbers discussed in this article!
After you determine the costs of potential properties in the areas of your choosing, then look at your personal budget and determine how quickly you can save up for your first rental property!