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Buying a Rental Property

So you want to invest in real estate and buying a rental property is the first step. Where do you begin?

First, it's important to know what your objectives are. Do you really want to develop a portfolio of rental real estate and tenants, or are you looking to buy a multifamily property where you live and receive income from tenants?

First things first. It's important to know what you can afford, and what your costs will be on a monthly basis.

If you are looking for a multifamily property that has 4 units or less, a standard residential mortage and downpayment will cover that - but be aware, most lenders want to know that you not only have existing income to cover the mortgage, but several months of reserves as well to cover expenses. If you are investing in a property with more than four units, commercial financing will be required, which is often more expensive.

Typically, a lender will not allow income from the rentals of the property you are financing to count toward the mortgage qualification if you are an inexperienced landlord. If you are experienced, a lender may use 75% of appraised rental estimate and subtract mortgage costs, insurance, and taxes to get the income figure.

Its important to identify where you want the property to be. Are you looking for multifamily properties close to home? Are you looking for a multifamily property that will be your home? Or are you looking for a property in a particular market that has a healthy demand for occupancy?

You want your rental property to be located in an area where there is a steady demand for housing. Find your property in an community where many people are employed in a local industry, or where the attraction is schools or community features. This way, half the work is done for you - you market the rental but there are people who are always looking to live in that community.

Finally, have a plan for ongoing maintenance. Tenants will report problems any hour of the day or night. You want to be alerted for emergencies immediately, but not for every complaint. Have a plan for how repairs are handled, complaints are made, and emergencies are reported. Using a property manager or management firm can help, and be well worth the effort, since they often have resources for repairs and maintenance, and systems for 24 hour alerts.

Once you have purchased the property, screen your tenants carefully. Require a credit check, a background check, and have everything in writing.

Rental income can be a great way to obtain passive income while accruing assets, but it is not a get rich quick scheme. With the right planning and work, you will succeed!

By Daisy Hammond

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