For some people, real estate is addictive. Once you’ve started making money off your first rental property, all you want to do is make more.
For some investors, acquiring a second or third rental property is a great idea.
For others, it’s not.
Even if you’re making money with your first and only rental property, make sure you do your homework before you take the plunge and buy more.
If you’re considering a new investment but don’t want to end up in hot water, take the time to review these 6 tips.
1. Do the Math
Before you buy any property, do the math to make sure it’s something you can afford. And since this is an investment property, make sure the amount of money you will make is worth the amount of work it will take.
When you’re buying a rental property that you don’t plan to live in, you’ve really got to make sure the numbers work. Otherwise, you may find yourself with a mortgage you can’t afford to pay.
Property managers can tend to be a bit trigger happy when it comes time to buying a second or third rental property. Keep in mind, having success on your first rental doesn’t guarantee you’ll have success with additional properties.
Treat every new property as if it’s your only source of revenue.
Crunch the numbers to make sure it is a worthwhile investment. Look at your potential profit margins. Know your mortgage rates. Research rent rates and management costs. And make sure you can afford the closing fees, insurance, and maintenance required.
If you come across a property that seems too good to be true, it probably is. Know when to walk away. It’s always best to leave those risky properties for the inexperienced suckers.
2. Know Your Inherited Tenants
Are you looking to purchase a property that already has tenants? Don’t buy until you can be sure that the current property owner has properly vetted everyone living there.
Don’t assume that because you have tenants in the building they are good tenants who will take care of the property and pay rent on time.
Ask the current property owner for as much documentation as possible on the existing tenants. The property manager or landlord will be able to share with you what criteria they used to qualify the current renters, like credit score, credit history and criminal background. The property owner should also give you details on rent payment history. You’ll need this info to understand the existing agreements and know what kind of tenants you’ll be dealing with.
In addition, make sure the current tenants have a written lease in place. You can even go a step further and ask nearby neighbors if they know of any trouble caused by the existing renters.
3. Familiarize Yourself with Rent Regulations
Familiarize yourself with the city or municipality and make sure you are aware of the rental regulations.
Different states and cities have different rental laws. Some properties are not allowed to charge over a certain amount for rent. This is something you should check out for your first property and every property you buy thereafter.
If your new property is part of a homeowners association, take the time to read through the bylaws and regulations. Some HOAs put short-term rental restrictions in place, meaning that you can’t rent your property out on AirBnB or VRBO.
4. Pay Down Debt First
It’s easy to get excited when you see money rolling in from your first rental. Some investors may be tempted to want to buy more. Resist the temptation and consider paying down debt on your first property before you rush to buy a second or third investment.
If you’ve followed the advice from step one and done the math, you may be confident that your investment will be profitable. If you are certain that you’ll bring in more profits than the interest on your current loans, you might be able to skip this step.
For those who are unsure or uncertain, the best decision may be to pay down debts owed on your first property before taking out another loan. This safe approach will protect you if the market takes a downward turn. The last thing you want to be is underwater on your loans.
Buy Something Rent-Ready
Some investors love the idea of a fixer-upper. Sure, you can save money on the purchase price, and if you can do some of the work yourself, it often sounds like a great idea. But as someone who already owns a rental property, you should know that the only way to be profitable is to have tenants. If you buy a fixer-upper, you will need time to fix the place and get it rent-ready.
Vacancies can destroy your profit margins. Every day your property goes without a tenant is a day that you’re losing money. It’s always best to look for something that you can rent out quickly.
Anyone who has renovated a property before knows two things—repairs always take longer and cost more money than expected. The more construction you need to do, the more money you’ll lose in tenant vacancies.
6. Look Near Your Current Properties
Experts often say that you should invest in what you know. If you’re already having success with one property, consider buying your second property in the same area.
Knowing the neighborhood and understanding the local clientele may make it easier to find tenants. It can also make property management much easier if your various properties are within close proximity of one another.
Just because you’re having success with one rental property doesn’t mean you’ll have success with two or three. Before you make a new investment, take the time to do your research.
Do the math to make sure it is a worthwhile investment. If you’re inheriting tenants, know who they are and make sure they pay on time. Know the rent regulations in your municipality so you won’t be surprised by capped rates.
Buy something that’s rent-ready and consider purchasing a property near your current investment. If the numbers aren’t working in your favor, avoid buying a new property and consider paying down your current debt instead.
Follow these tips and you just might decide that one successful rental property is all you need. On the other hand, if the numbers work and you’re confident it’s a good idea, you might want to take the risk and acquire that second or third property. And with a little luck, in a few years, you could be well on your way to being a real estate tycoon.