If you're at all familiar with my strategy, then you understand that passive income can be an effective way to neutralize the impact of massive amounts of student loan debt and can be the easiest way to build equity. Rental income is a great way to get started. One of the biggest problems that many new real estate investors face is finding the right property. It can take a long time to save up money for a down payment, so you'll want to find a low risk property for your first rental, to minimize the chance of buying a dud that eats away at your return and depletes your savings. Here's what your first low-risk rental should look like.
You live in it
Living in the property that you rent out is an excellent strategy for your first rental property. You have to pay rent or a mortgage to someone. You might as well pay a mortgage and build some equity in the process. The sooner you purchase a property, the more you will benefit from loan pay down and appreciation and the more equity you will have. Early on, many young adults find themselves living with roommates anyway. Living in a property also gives you intimate knowledge of what will need maintenance in the future, and what needs to be improved to increase the rental income. Lastly, by living in a property, you're able to use a much lower down payment, which ties up a significantly smaller portion of your money into a property.
More than one unit
Properties with more than 1 unit greatly lower the risk of financial loss, because losing a tenant doesn't mean you'll miss a mortgage payment. You might not be able to cover the entire mortgage with 1 unit, but it's not uncommon in some areas for 1 unit to cover the vast majority of a mortgage payment. This allows you time to screen tenants and update the other unit(s) during turnover. Additionally, if you live in a multi-unit property, your own living expenses are greatly decreased, allowing you to increase your savings, and invest in other areas, even further diversifying your risk.
Built within the last 10-20 years
The idea for your first property is to focus on the lowest risk first. Narrowing your focus can limit the number of properties available, but with patience, it can provide a great piece of mind knowing that any major liabilities like plumbing, electrical, and HVAC should be up to modern codes and easy to repair if something breaks down. Lastly, modern homes are much more likely to have open floorplans, and standard room sizes and layouts, which will bring in higher rents and higher quality tenants.
No signs of damage or major repair
The last item is just as important as the first three. You want to thoroughly inspect the home during your showing and inspection to make sure that there aren't any signs of water damage on the floors, around the doorways, or anywhere on the ceilings. Even signs of recent repair in these areas might be an indication to look for another property for your first investment. One thing I've learned while purchasing properties is that it's very difficult to prove what the previous owner did and didn't know about while they owned the property. Something as simple as the roof leaking can easily be "fixed" with a new coat of paint on the ceiling. The next time it rains however, you could have a pool of water in your living room, and the previous owner can deny knowing anything about it, or say that it was repaired at the time they sold it. That's some of the risk you take buying a property. Ensuring that nothing has been patched over recently and that all repairs are sound can be the best way to keep you from losing thousands of dollars on your first investment property.
Rental properties can be a great way to increase your passive income, and work your way closer to financial freedom. Minimizing the risk of your first property is imperative if you're going to maximize your return and growth in the initial phase or your plan. By living in a multi-unit property that's been built fairly recently, and shows no major signs of damage or recent repair, you can ensure that your career as a landlord starts out as easily and as smoothly as possible.
You live in it
Living in the property that you rent out is an excellent strategy for your first rental property. You have to pay rent or a mortgage to someone. You might as well pay a mortgage and build some equity in the process. The sooner you purchase a property, the more you will benefit from loan pay down and appreciation and the more equity you will have. Early on, many young adults find themselves living with roommates anyway. Living in a property also gives you intimate knowledge of what will need maintenance in the future, and what needs to be improved to increase the rental income. Lastly, by living in a property, you're able to use a much lower down payment, which ties up a significantly smaller portion of your money into a property.
More than one unit
Properties with more than 1 unit greatly lower the risk of financial loss, because losing a tenant doesn't mean you'll miss a mortgage payment. You might not be able to cover the entire mortgage with 1 unit, but it's not uncommon in some areas for 1 unit to cover the vast majority of a mortgage payment. This allows you time to screen tenants and update the other unit(s) during turnover. Additionally, if you live in a multi-unit property, your own living expenses are greatly decreased, allowing you to increase your savings, and invest in other areas, even further diversifying your risk.
Built within the last 10-20 years
The idea for your first property is to focus on the lowest risk first. Narrowing your focus can limit the number of properties available, but with patience, it can provide a great piece of mind knowing that any major liabilities like plumbing, electrical, and HVAC should be up to modern codes and easy to repair if something breaks down. Lastly, modern homes are much more likely to have open floorplans, and standard room sizes and layouts, which will bring in higher rents and higher quality tenants.
No signs of damage or major repair
The last item is just as important as the first three. You want to thoroughly inspect the home during your showing and inspection to make sure that there aren't any signs of water damage on the floors, around the doorways, or anywhere on the ceilings. Even signs of recent repair in these areas might be an indication to look for another property for your first investment. One thing I've learned while purchasing properties is that it's very difficult to prove what the previous owner did and didn't know about while they owned the property. Something as simple as the roof leaking can easily be "fixed" with a new coat of paint on the ceiling. The next time it rains however, you could have a pool of water in your living room, and the previous owner can deny knowing anything about it, or say that it was repaired at the time they sold it. That's some of the risk you take buying a property. Ensuring that nothing has been patched over recently and that all repairs are sound can be the best way to keep you from losing thousands of dollars on your first investment property.
Rental properties can be a great way to increase your passive income, and work your way closer to financial freedom. Minimizing the risk of your first property is imperative if you're going to maximize your return and growth in the initial phase or your plan. By living in a multi-unit property that's been built fairly recently, and shows no major signs of damage or recent repair, you can ensure that your career as a landlord starts out as easily and as smoothly as possible.
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