How to Buy a Rental Property

Investing in rental properties can be a rewarding way to build wealth and secure a steady stream of passive income. However, knowing where to start can feel overwhelming, especially with so many factors to consider. Whether you're a first-time investor or looking to expand your portfolio, this guide will walk you through the essential steps to confidently purchase the right rental property.

Is Buying a Rental Property a Good Investment?

Investing in rental real estate can be both financially rewarding and personally fulfilling, as it allows you to generate income while providing others with a place to call home. To succeed, it’s essential to fully understand your responsibilities, potential liabilities, and any limitations you may face. Even if you choose to work with an investment partner or hire a property manager, you can still build a thriving real estate portfolio and achieve success in this venture.

How to Buy a Rental Property

The process of buying a rental property can be straightforward as long as you have some guidance to follow. Understanding the steps involved will help you navigate the process with confidence and avoid common pitfalls. Here is a detailed step-by-step guide to help get you started:

1) Research Rental Markets & Location

Choosing the cheapest location doesn’t always mean choosing the best. Instead, focus on finding a neighborhood that is safe, appealing, and has long-term potential. Consider factors such as local amenities, public transportation, school districts, crime rates, and other key elements you’d evaluate if you were buying a home for yourself. If it’s a place you’d want to live, chances are high that others will feel the same. Neighborhoods with low crime, strong public transit options, and a growing job market often attract a larger pool of renters.

Once you’ve narrowed down a neighborhood, dive into the rental data. What’s the average rent in the area? How many properties are currently vacant? Is there strong demand for rentals? What types of properties are being rented? You may find that your preferred neighborhood isn’t ideal for generating rental income. Instead, prioritize areas with higher average rents and lower vacancy rates to maximize your return on investment. Additionally, neighborhoods experiencing population growth or undergoing revitalization projects can present valuable investment opportunities with significant upside potential.

Understanding local property taxes is also essential. While rental properties in sought-after neighborhoods can generate higher income, they often come with steeper property tax obligations. Luckily, property tax records are public and easily accessible. You can review a property's tax history through local government resources. To gather this information, contact your county assessor or tax collector’s office for assistance.

2) Determine Which Type of Rental Property to Purchase

Do you want a single-family home, a duplex, or an entire apartment building that can host a dozen tenants? The type of rental or investment property you choose to invest in will depend on your budget, location, and investment goals. Each type of property has its own benefits and considerations.

For example, single-family homes are a popular choice for first-time real estate investors because they are relatively affordable and easy to manage. As the landlord, you only have one tenant to deal with, making it more manageable than managing multiple units or tenants. However, single-family homes also have lower potential for generating large amounts of rental income compared to multi-unit properties. They also tend to appreciate at a slower rate than other types of properties.

Investing in land, particularly agricultural and recreational land, offers versatile opportunities, such as leasing it to farmers for agriculture or renting it out for recreational activities like camping and hunting. While lease terms may differ, land leases for farming or hunting can generate a reliable stream of passive income, similar to the returns from traditional rental properties.

3) Conduct Due Diligence

Researching the property and conducting due diligence are essential steps once you’ve identified potential investment opportunities. Start by thoroughly investigating the property’s history, zoning laws, and potential for future development. It’s vital to verify the property lines through an official survey and check for any existing liens or easements that could affect ownership or usage rights. Additionally, assess the surrounding area for market trends, nearby amenities, and infrastructure that could impact the property’s value over time.

When conducting due diligence, be aware of common risks such as environmental hazards, including contaminated soil or flooding risks, which may require costly mitigation efforts. Properties with unclear legal titles or unresolved disputes can also pose significant risks, so consulting local authorities or a real estate attorney is advisable. Carefully evaluating all these factors can help you make informed decisions and avoid expensive pitfalls in your real estate investment journey.

You can find properties for sale nationwide on LandApp's free marketplace. Filter by size, location, acreage, property type, price, and more to find rental properties for sale that fit your desired criteria. Each listing on LandApp's marketplace is embedded with proprietary data like our risk index scores, allowing you to conduct due diligence and find potential hazards at a glance:

View Listings on LandApp's Marketplace

4) Finance Your Rental Property

If you have the funds available, you could purchase the property outright. However, for most of us, that's not an option, so securing a mortgage is likely your next step. When it comes to financing a rental property or financing a land purchase that won’t serve as your primary residence, your options may be more restricted. Government-backed loans typically cater to owner-occupied homes, so you’ll need to explore alternatives like home equity loans or cash-out refinances.

Keep in mind, buying an investment property or buying land often comes with stricter financial requirements. Down payments are usually higher, ranging from 15% to 20%, and you’ll likely encounter higher interest rates alongside more rigorous qualification criteria.

Securing a mortgage for a rental property, also known as a non-owner-occupied loan, is quite similar to obtaining one for a primary residence. The first step, as always, is to get preapproved. A preapproval not only gives you a clear picture of how much you can borrow, the interest rates you qualify for, and the loan terms available, but it also demonstrates to sellers that you’re a serious and prepared buyer.

5) Receive and Accept Offers

Once you’re preapproved and have found the perfect property, the next step is to make an offer. If your offer is accepted, you’ll move forward with the mortgage process. Expect additional steps, such as an appraisal and inspection, before reaching the closing stage. Ensure all your paperwork is organized and complete. After closing, you can address any necessary repairs and begin searching for tenants.

Making Money From Rental Properties

Operating expenses for rental properties can vary significantly, typically falling between 35% and 80% of your gross operating income. For example, if you collect $1,500 in monthly rent and your expenses total $600, your operating costs account for 40% of your income. To simplify budgeting, many investors use the "50% rule" as a guideline: if your monthly rent is $2,000, you can expect to spend roughly $1,000 on expenses. This rule offers a straightforward way to estimate costs and plan your budget with greater accuracy.

How to Find Rental Properties for Sale

Find rental properties for sale across the country on LandApp's nationwide marketplace. Easily navigate property listings filtering by size, location, acreage, property type, price, and more to discover properties that match your needs. Every listing on LandApp comes with built-in data, like geographical features and our risk index scores, so you can quickly spot any potential risks and do your due diligence with ease. Download LandApp for free on the Apple and Google Play Stores or view listings today:

View Listings on LandApp's Marketplace