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How to Buy Your First Rental Property (And Start Your Future Empire!!)

Thinking about investing in your first rental property? Talk about exciting! I remember when I bought my first rental house back in 2015 (I still have it in fact!). The purchase, the first renters, the consistent income, the appreciation of the asset. All amazing steps, and a great way to create lasting wealth! But, that first property…it can be a bit scary. I totally get it! Want to know how to buy your first rental property? Stick with me. We’ll walk through all the steps together!

Is Investing In Rental Property a Good Idea?

Before you even ask any detailed questions, you’ll first want to know…is investing in rental property a good idea?

Well, if you…

  • Aren’t reliable
  • Can’t manage people well
  • Don’t like hands-on tasks
  • And, if you want a completely passive investment…

…then investing in rental properties probably isn’t for you!

But, if you like people, you love the idea of creating a business you have control of, and you like physical real estate, then you might just have something here! Investing in rental properties is probably a good idea for you!

Related: The Rental Property Wealth Calculator: Your Path to Millionaire Status

Want to know how to buy your first rental property? Here's how I did it!How to Buy Your First Rental Property

If you’re still reading, then I’m assuming that you’re still interested…and that you’re molded for investing in real estate (vs. passively investing in index funds or REITs).

So naturally then, the next question is how to buy your first rental property?

  • Do you buy a rental property with all cash?
  • Should you look for something with no money down? 
  • Or, should you go the more conventional route and put 20% down to buy your first rental property?

And…is there really a right answer? Or a best answer? 

I’ll let you know what I did to buy my first rental property, and then what most others do, and then I’ll let you decide how you should buy your first rental property.

Related: Top 10 Things to Consider When Buying a House

Property Investment For Beginners

You’re a beginner property investor, and that’s totally fine! That was me back in 2015! 

When you’re just getting started as a real estate investor, the key is to take things slow. There are big dollars at stake and you don’t want to make silly mistakes.

Investing in Rental Property For Beginners

You’re wondering how to get your first rental. Let me tell you, the housing market today is tougher than it was back in 2015. 

Everybody and their brother wants a house right now. When one house goes on the market, 20 people immediately show up and they fight for who’s going to pay full price (or more!).

It’s not a buyers market, which makes things that much more difficult if you’re trying to learn how to buy a rental property.

The key to buying your first rental property investment, as I already stated earlier, is to be patient and learn like crazy before you act. 

  • Learn about the housing market in your area. Where are the good neighborhoods? Which pockets of town are less desirable?
  • Who are your model tenants? What type of home would they like?
  • What are the average prices in your area?
  • Who do you know that might be able to get you an insider deal? A realtor? A friend of a friend that will soon be selling their house?

When I was first thinking about how to buy my first rental, these are all the questions I asked myself before I even found a house I was interested in. 

Before you start bidding on a house, you need to know the values of houses, what you can get for rent, and if you’ll attract the right renters with the homes you’re looking at.

Then, when you find that perfect house for a great price, train yourself to act, and to act quickly!

Related: We Bought a Rental House With Cash – One Year in Review

How much does solar energy save each year?How Much Money Do You Need to Buy Your First Rental Property?

I bought my first rental in 2015 for $81,000. And I bought the house with all cash.

The cash purchase got me a great price on the house, and it also allowed me to have patience for screening my future tenants (since I didn’t have to quickly get tenants to cover my mortgage). 

Since that purchase, we have earned over $70,000 in cash flows and the house has appreciated by 2.5 times.

And that leads me to my next point… With the housing market inflating as quickly as it has in the past few years, there really aren’t cheap houses out there anymore. And, with $200k+ houses as the base level starter house (in a cheap area!), you’re probably not going to have the cash to buy them outright. 

So…you’re not only wondering how to buy your first rental property, you’re asking “How much money do you need to buy your first rental property?” (i.e. How much will you need for a down payment?).

Let’s explore that question further.

How Much Money Do You Need to Start Owning Rental Properties?

Not only do you want to know how to buy your first rental property, you want to know a bunch of other important stuff too. Like, how much money you need to start owning rental properties? 

How much do you need to invest in real estate? 

For most first-time real estate investors, the bank will require you to put 15%-20% down on your property. If your prospective house is $200,000, that means you’ll need $30,000-$40,000 saved up just for the down payment. 

Then, you’ll want to have some cash reserves for incidentals (which there almost will certainly be!) and to float you a while in case you can’t find the right renter. 

For this example, I’d recommend having at least $60,000 — that’s $40k for the down payment and $20k in cash reserves for whatever might come your way. 

If you stress easily…then you might want $80,000. Having more money keeps you from doing dumb things. 🙂

save up for a houseWhat’s the Best Way to Finance Your First Rental Property?

What about financing? What’s the best way to finance your first rental property?

In my opinion, the best way to finance a rental property is with a long-term fixed rate mortgage – with the 30-year option being the most common. 

  • Sellers like the conventional fixed loan because it means less strict appraisals and inspections (ie. it’s easier for them to sell their home to you)
  • You, the buyer, will find this loan type to be less of a hassle and likely at a cheaper rate vs. the other loan options,

Sure, you’ll have to find that 15%-20% for a down-payment, but the reduced hassle factor around your rental loan is HUGE. After all, you might just have all the hassles you can handle with your future renters! 😉 

The long-term 30 year loan is also a good idea to increase your monthly cash flow, which may be challenging at first. Then, if you’re doing well later on, you can decide to put additional dollars toward the loan and pay it off sooner.

Related: Buying a House? What Type of Mortgage Loans Are Best?

How to Buy Your First Rental Property With No Money

Wondering how to buy a rental property with no money? 

You know what I hear when that question is presented to me?

“Hey Derek. I really want to get rich fast. I don’t have time to save up $60,000 to invest in rentals, so how can I guarantee myself failure in real estate by buying a place with no money down?”

Seriously. 

If you want to fail in real estate, you’ll try to buy a rental property with no money down.

With this method, you’ll likely…

  • overpay on the purchase,
  • pay more interest than necessary,
  • be in a rush to get tenants in (since you don’t have extra money to cover the mortgage),
  • and then your crappy tenants (that you didn’t screen) will trash the place.

You’ll then sell the property at a loss and tell everyone that investing in real estate is stupid and doesn’t work. 

Don’t try to buy real estate with no money down. Instead, work your butt off, save up the right amount of money, buy a great rental, and then become rich (slowly at first, but exponentially fast later on)!

Related: Should You Build a House in 2022? (Will It Save You Money??)

income restricted apartmentsShould You Buy One Rental Per Year?

I’ve heard of this tactic from a few real estate gurus. Essentially, if you buy one rental property per year for 10 years, you’ll develop enough cash flow to retire and become a future millionaire with your real estate assets. 

Is it true?

Should you buy one rental per year?

I’d say yes IF…

  • you have the appropriate cash flow to put 20% down on each of the properties
  • you’re actually finding good deals on these properties (don’t just buy another place because a year went by)
  • and, only if you’re comfortable with a HUGE debt load (buy 10 places at $200k each, that’s $2 million in debt!)

For me, I couldn’t do it. The debt load and the monthly payments were just too big for me to swallow. Personally, I’d rather take it slow and keep my risk at a minimum. 

If you’re all about taking the risk and the big mortgage loans, then maybe it’s a great play for you. Just be sure to only buy properties at a deal. That’s where the money is made, on the buy!

Is Now a Good Time to Buy Your First Rental Property?

At the time of writing this post, we’re going into 2022. So…is 2022 a good time to buy rental property? 

Based on what I see, here’s where we’re at:

  • The pandemic hit in 2020 and house values started soaring (good for home owners, bad for home buyers)
  • Then, supply for home building materials vanished and home builds became slow and expensive…which made existing homes even more in demand, which meant the prices continued to soar
  • Monthly rents have increased slightly, but haven’t come close to catching up with home values.

All this to say that homes are expensive right now and the rent you’ll get for a house may not be enough to earn a profit! So, buying an investment property to rent out may not be all that smart unless you find a screaming deal somewhere. 

Related: Rental Properties – Are They a Curse or a Blessing?

stop house hopping - realtor feesWhat is the Real Estate 1% Rule?

To get an idea if a house investment is a good buy, remember the real estate 1% rule

The 1% rule is simply this — The monthly rent should be at least 1% of your real estate purchase price. 

So, if you buy a rental house for $200,000, you’ll ideally want to get $2,000 a month in rents. 

In my area currently, you’d buy a $200,000 house and you’d likely rent it out for $1,500 (only at 0.75%, not the ideal 1%).

  • Your monthly mortgage payment will likely be $1,000 a month
  • Then tack on insurance and property taxes for another $400 a month
  • Plus any maintenance costs or vacancies…

…and you’re making nothing on your investment. In fact, you’re likely losing money!

Like I said. Try to find a screaming deal. Otherwise, the rental game might not be the best investment right now!

How to Buy Your First Rental Property – Will You Do It??

So that’s pretty much everything you need to know about how to buy your first rental property – along with if you actually should or not. 😉 

What’s your take? Are you ready to take on the risk and make the investment? Or do you think you’ll wait a while on the real estate investment game? 

I’m waiting and investing elsewhere…but what about you? Tell us in the comments below!

Grow Rich Housing Money Passive Income Rental Property

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

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