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<\/figure>\n\n\n\nFirst, when you buy the right property, you earn a profit every single month in the form of rental income, known as cash flow. Each property becomes like a small oil well: they pump money 24\/7. The more units you have, the more financial freedom you have.<\/p>\n\n\n\n
Reason #2: Loan paydown<\/h3>\n\n\n\n
Second, you use a loan when you add to your real estate portfolio, which means you don\u2019t need all the money upfront. You can even add properties for as little as $0 down.<\/p>\n\n\n\n
And here\u2019s the cool thing. Over time, that loan is paid off by your tenants. You might start off owing a large amount, like $200,000, but in 15, 20, or 30 years, that\u2019s paid off by someone else.<\/p>\n\n\n\n
Reason #3: Appreciation<\/h3>\n\n\n\n
Third, rental properties tend to appreciate in value over time, which means while the tenants are paying off the mortgage, the property value is appreciating.<\/p>\n\n\n\n
Reason #4: Tax benefits<\/h3>\n\n\n\n
Fourth, there are many tax benefits that go with owning rentals. It\u2019s possible that you will pay very little in taxes, and sometimes no taxes, on the money that you make from rentals.<\/p>\n\n\n\n
How to buy rental property: Start with research<\/h2>\n\n\n\n
Learning how to buy real estate isn\u2019t a linear process. You don\u2019t go from Point A to Point B but instead, take a number of detours in your education from being a complete novice to buying your first property. Although that journey is different for everyone, there is a certain order of lessons to make your voyage into the world of property ownership as smooth as possible. Consider the following steps:<\/p>\n\n\n\n
Step 1: Educate yourself<\/h3>\n\n\n\n
For a lot of people, this is the hardest part, but it\u2019s a solid and necessary first step in figuring out how to buy a rental property. Keep reading and talking to pros (other investors) and others who are seasoned in the industry. Do everything you can to learn as much as you can so that you feel ready and prepared to make your first investment.<\/p>\n\n\n\n
Step 2: Determine your market<\/h3>\n\n\n\n
It helps to find your first deal locally or only an hour or two away. Dig into websites like Realtor.com and Zillow and also start looking at different properties in your area to see what the prices are. Get a feel for the locations where prices are higher or lower. If possible, connect with other rental property owners in your area to see where they are buying.<\/p>\n\n\n\n
You don\u2019t have to invest in your own backyard first when starting out, but it definitely makes the journey a bit easier. However, say you want to buy rentals but you live in downtown San Francisco. You can consider a market farther away. Invest when the numbers make sense with the plan you have.<\/p>\n\n\n\n
After you\u2019ve defined your market, do your homework to understand as much as possible about that market. Where do people like to live? Where are property prices higher or lower? What are the rents? What about crime? Talking with local real estate agents, lenders, property managers and other local investors can be tremendously helpful.<\/p>\n\n\n\n
When you\u2019re studying what kind of neighborhood you want to invest in, divide them into three classes to make them easier to identify.<\/p>\n\n\n\n
- Class A: <\/strong>These neighborhoods include mostly homeowners who typically take a lot of pride in their homes with beautiful upkeep. That won\u2019t translate into it being a good option for a rental property.<\/li>
- Class B:<\/strong> This is the middle ground among the three classes. These neighborhoods tend to have a wide variety of people and a mix of both renters and homeowners. This is the best class to invest in, and a 35% to 65% ratio of renter to homeowner is the sweet spot.<\/li>
- Class C: <\/strong>These neighborhoods are mostly rental properties and don\u2019t have the upkeep of those in Class A. These may not be the best neighborhoods to invest in because they tend to have high turnovers, and you\u2019ll learn that constant vacancies cost you a lot of money.<\/li><\/ul>\n\n\n\n
\n\n\n\nFigure out the money<\/h2>\n\n\n\n
Step 3: Get preapproved for financing<\/h3>\n\n\n\n
For your first deal, use a bank or local lender to finance your real estate deal.<\/p>\n\n\n\n
They typically require 20% down for a rental property. If you buy a property with multiple units, say a duplex, triplex, or fourplex, and you live in one of the units for a year, you can get a down payment as low as 3%. If you\u2019re qualified to get a VA loan or USDA loan, it could be 0%. Talk with some local lenders to find out what programs they have and what you qualify for. Note that this same method may not work for buying family homes.<\/p>\n\n\n\n
If you don\u2019t have enough money to put down, you can try networking with other real estate investors in your area. You might be able to partner with someone on your first deal in that you bring the deal and they bring the down payment. Obviously, that\u2019s a bit trickier to work out than putting down your own money.<\/p>\n\n\n\n
When it comes to owning an investment property, your budget involves more than how large a mortgage you can afford. In addition to considering monthly mortgage payments, you also need to keep in mind the ongoing costs of owning and renting out the property\u2014utilities, maintenance and upkeep, taxes, etc. You then need to weigh those costs against how much you realistically expect to collect in rent from your target tenant.<\/p>\n\n\n\n
- Class B:<\/strong> This is the middle ground among the three classes. These neighborhoods tend to have a wide variety of people and a mix of both renters and homeowners. This is the best class to invest in, and a 35% to 65% ratio of renter to homeowner is the sweet spot.<\/li>