How to Buy Your First Rental Property
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I bought my first rental property at 28 years old. It was a duplex, so my family could live on one side and rent out the other. It sounded like a good investment, I wanted a little rental income, I was tired of being told by my landlord what I couldn’t do in my own space, and my bank account and credit score were primed for a purchase.
I had no idea what I was getting into, but I am still glad we became rental property owners. Since then, there have been ups and downs, a lot of educational opportunities, and unexpected costs. But rental property investing has brought us many unexpected benefits and a solid return on investment. We still haven’t sold our first investment, yet we’ve been able to create a reliable income from the monthly rent.
In this article
What to consider before buying a rental property
Think about the decision a lot before buying your first rental property. My experience as a first-time property manager has been very good. Still, I’ve talked to other property owners who have had different experiences because they didn’t consider all the implications of becoming a landlord.
Becoming a landlord can be an excellent way to grow your wealth, but like any other job or career, you need to ask yourself if you will enjoy it enough to want to do it long-term. Yes, you can sell the home at any point. But if you sell too soon or in a bad real estate market, you will lose money on your investment. You need to enjoy owning a home enough that you can hold onto the home until it is right to sell.
You also need to have enough capital to keep the home. You will still have a monthly payment—your mortgage payments. And your home maintenance and repair costs can be high. You need to be able to keep a bit of money sitting, ready to be used in case of a major repair.
And then there is the actual job of being a landlord. You will have to find renters for your property, potentially negotiate prices with them, research their reliability, create rental agreements, enforce the agreements (sometimes even including eviction), fix problems that arise in the home (or pay someone else to fix them), and keep the renters happy enough to stay a while.
You could pay someone else to be your property manager, but this is usually too expensive to do on your first rental property. Your operating income with only one rental property will likely be too low to justify paying someone else. For a while, you will have to be the property manager.
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Six steps to becoming a landlord
If you’ve decided real estate investing is right for you, here are some steps to follow to buy your first investment property.
1. Choose the right property
Determine what type of property fits your budget, abilities, and needs. For example, for my first rental property, I purchased a duplex that I could use as my primary residence while renting out the other side.
Another option is to buy a fixer-upper. This will lower your initial purchase and closing costs because it should have a low property value compared to the homes around it. But it will require you to do a lot of updates and renovations. This will either be covered by your own cash flow or by your mortgage.
Another aspect that needs to be considered when buying your first property is the location (e.g., proximity to your own residence, businesses, parks, or schools), as well as the fluctuation in home value in the neighborhood and the size of the home.
Pro tip: The larger the home, the more labor-intensive it will be, and generally, the more difficult it will be to find renters.
Once you’ve chosen a property, get pre-approval for a loan and close the deal. You’re a landlord!
2. Research landlord-tenant laws
Don’t forget about researching landlord-tenant laws. The state determines these laws, so they vary depending on your location. Research these and learn what you are allowed to do (and not do) to create a viable legal contract without accidentally breaking any laws.
For example, Nebraska landlord-tenant law allows only one month’s rent as a security deposit. It also requires disclosing the identity of anyone authorized to act on the landlord’s behalf (like a business partner or spouse) and maintaining all plumbing fixtures in working order.
3. Purchase landlord insurance
You will need landlord insurance for your property to protect against damage or accidents. This is a minimal cost, averaging about $1,300 per year nationally, but be sure to factor it in when determining your operating expenses. Your insurance company should already provide this and will be able to give you estimates for different types of insurance.
This insurance policy will usually cover rental basics like your property’s structure, legal costs, medical expenses related to your property, and loss of income arising from repairs to your property.
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4. Determine rental price
The rental price needs to walk a fine line. If it is too low, you will potentially lose money by not gaining enough income. You will potentially lose money by not getting renters if it is too high.
Do a little research and add up some costs to find the right rental price for your property. Add up all the ongoing costs associated with your rental: property taxes, mortgage, utilities (the ones you are covering), insurance, and repairs. Then research rental costs of similar homes in the area through sites like Zillow, Trulia, or Apartments.com. This may involve doing more than a Google search, though. You might even have to call a few other landlords, but all this research can usually be done from your home.
5. Find renters
There are a few ways to find renters, but most landlords advertise their rentals online. Word of mouth is also a reliable way to find renters. Talk to your friends and neighbors. Tell them you have a property available — they might know someone looking.
You could also host an open house. Advertise with flyers and handouts, post some ads on Zillow, Trulia, Nextdoor, or Facebook, and place a sign in the yard. Schedule a time to stage the home and talk to the people who show up. Have some information ready to give them when they arrive and something for them to take home so they can give it some consideration.
Another option is renting your property on short-term rental sites like Airbnb or Vrbo. These can provide a reliable source of income but will have many other factors to consider.
Once you’ve found a potential renter with a good rental credit report, you will also need to have a lease agreement ready for them to review. Make sure it outlines any HOA restrictions and clearly states the expected security deposit, so there are no surprises before they sign.
Related: Best U.S. Cities for Renters in 2023
6. Maintain property
Finally, you can sit back and relax. Or you may have to run out the door when you get a text telling you a water line has burst.
Newly purchased properties often have a lot of small issues to work through. Make sure to maintain the property and ensure your renters are safe and satisfied. This could mean long periods without having to do much beyond checking in on their needs. Or it could mean a lot of maintenance and updating. Hopefully, your first rental property will become a solid investment and a fun side business—or maybe more.
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Companies and resources to help you become a landlord
Federal Housing Administration
The Federal Housing Administration makes it financially easier for first-time home buyers to transition into homeownership. It gives mortgages with low interest rates to these buyers and allows lower down payments. I was able to use this program to purchase a duplex, live on one side, and rent out the other. This helped me establish an ongoing income.
Zillow
The Zillow app and website are helpful ways to check nearby home and rental prices and advertise your new rental. Zillow also tracks prices for all the homes in your area, and if you sign up, they will send you a monthly home report that gives you an idea of how your home is doing compared to the local market.
Trulia
Another online rental advertiser, Trulia will list your home for free and compare it to other local listings. It is an easy site with lots of listings, both to rent and purchase. This will help renters find your property (and possibly help you find a property to purchase), but because it is free, it may also include false listings.
Nextdoor
Nextdoor is an app that does much more than list properties. It has, in some ways, become the Facebook of neighborhoods. It has a private feed where you can post and interact with your local community. Nextdoor also allows you to list your rental and post it to your local feed, helping neighbors see your rental and pass it on to their friends.
A Facebook post could be your best shot at finding a reliable renter. One of your friends may need a place without you even knowing it. Or their friend may be looking. When I have needed a renter, this has been my most reliable resource for word-of-mouth advertising.
Airbnb and Vrbo
There are other ways to rent nowadays in addition to the standard, long-term rentals. Airbnb and Vrbo have opened up the short-term rental market. You could rent your property for a few nights at a time instead of dealing with finding someone who wants to live in it for 12 months or more.
Short-term rentals could mean more ongoing work as you clean it and continue to manage your account (responding to inquiries, updating prices, and more). But if done right, it could also mean more income.
Free lease agreements
As a landlord, you’ll have to create a lease agreement. You may want it to be reviewed by a lawyer to check for errors, but thankfully you can start with free online templates. Some of these can be found at sites like Legaltemplates.net or eforms.com. But remember, these will need to be tailored to your state.
Costs
Property maintenance
Every landlord hopes that property maintenance is minimal, but it is unavoidable. Something is bound to break. You need to be prepared with some extra cash in your bank account when it does.
Factor in a certain amount of maintenance costs every year. Every home will incur different costs, but a typical standard to follow is the 1% rule. Factor in 1% of the overall home’s value for maintenance. At first, you may have to guesstimate. Over time, though, you will start to know your home’s needs and be able to predict upcoming repairs.
Landlord insurance
Landlord insurance is required, but it’s not a big cost. And when you need it, you will be glad you have it. Major home repairs (or replacement) can be far more than some of our bank accounts can handle.
The national average cost is $1,288 per year. Include this in your rental price to ensure you make a profit.
Property and income taxes
Another unavoidable cost is taxes. You will be taxed on your property and your rental income. Property taxes are generally low, around 1 to 2%, but income taxes are much higher. Depending on your other income, they could be 20 to 30% or more. This will be before deductions, so make sure to factor those in as well.
HOA fees
If you purchase a home in an HOA, you will most likely be taking care of the HOA fees. Consider these costs before purchasing the property. HOA fees vary drastically depending on the amenities offered but average about $200 to $300 per month. These costs will affect the rental price and potentially the ease of finding renters.
Pros and cons
Pros
- Extra income. Purchasing a rental property can give you a solid, long-term income that can either add to your other income or, in some cases, become your primary income. It is a dependable method of padding your bank account. And it is a method that doesn’t require any extra degree or expensive certifications.
- Stable investment. Even though the 2008 crash showed that real estate has flaws, it is still considered one of the most stable investments—as long as you research. Research your purchase, evaluate the risks and benefits, and commit. Most real estate investments are stable and reliable.
- Flexible work schedule. Managing a few rentals isn’t going to require you to be in an office daily. You’ll be able to adjust the schedule to your preferences. You can decide when you will be doing the minor repairs (or hiring someone to do them,) when you’ll be searching for renters, and when you will look for your next rental property.
Cons
- Extra work. Managing a rental property is not a form of passive income. Passive income means income that does not require ongoing work. Real estate investors do have to do ongoing work because they have to continue working with their properties—even if they hire a property manager. However, owning a rental property is closer to passive income than working in an office or a 9-to-5 job.
- Requires more liquid capital. Real estate investors need to be ready to pay for emergencies up front. Because of this, before buying a rental property, you’ll need to save some extra cash that you could have invested elsewhere.
- Being on call. The flexibility of your schedule will end when there is an emergency. You’ll need to be ready to jump up and run when your renter tells you about a burst pipe or broken window.
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The bottom line
Real estate investing has proven to be a reliable and stable form of income for me. And I hope it does the same for you. Like any form of income, it comes with its risks, pros and cons, and complicating factors. But it can be a powerful way to grow your income, improve your financial stability, and set yourself up for long-term success.
Discover your property, choose your lender, find your renter, and become a landlord!
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Writer
A veteran wordsmith and research nerd, Brittany Wren spent a decade working in higher education where she helped people overcome challenges to chart a path forward. These days, she writes about personal finance, careers, parenting and education. Her content has been published by a wide variety of brands including T-Mobile, Intuit, LifeLock, Reliant Fund Administration and CURO Financial Technologies Corp.
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