Kalamazoo, MI · Member since 2014 · 19 posts · 0 votes
I am thinking about buying my first rental property. Is there anything I can do to protect my credit if in case it fails? Also any suggestion about the price range I need to stay within? Any other advice will be greatly be appreciated.
A few general rules of thumb that I've found to be pretty true:
1) the famous 2% rule: See if the market rent for the property you buy is at least 2% of the purchase price. Ex) If you're looking at a house that costs $50k, you'd want the monthly rent you can command to be in the neighborhood of $1000. I think most people will say that it's difficult to find these 2% properties and I definitely agree.
2) the 50% rule: Whatever you're paying out in Principle, Interest, Taxes, and Insurance each month (so essentially your monthly mortgage payment), it should be 50% or less of what you're taking in each month in rent. Ex) If you're PITI payment is $400/mnth, you'll want a place that can be rented out for $800/mnth.
I have limited experience from just one long RE venture, but I found each of these rules to be pretty true (despite the fact that - when I first heard them - I thought they were ludicrous and ridiculously conservative).
Why would it fail. If it doesn't go perfect, you still should have a salvageable deal if you buy right. Don't overspend and you will be fine. As long as you are buying in an area that has a need for rentals. Don't worry so much about failing, worry more about finding a good deal and get after it.
Thank you Arlan Potter. I am not worry about failing. But things happen. Success comes with failure most of the time. So as a newbie, I just want to have a plan intact incase if I should fail in my first attempt, how can I make sure that my credit doesn't get hurt so much that it will make it harder for me to get loans elsewhere and invest again in the future.
I would suggest buying a house that has a basement apartment, or a duplex and renting half of it out. That way if you "fail" you know that at least you can cover your own mortgage.
Don't take to big of a bite on your first go at it, build on your experience, you may find managing tenants is not something you want to do.
As far as credit, there is risk involved with all investing because we can't predict what will and won't happen, but you want to take calculated risk.
What are you thinking will happen in terms of failure anyway? inability to find tenants?
I don't know your area but i would suggest finding a 4 family and living in one manage it your self and live rent free. This will provide you with the information you need to see if you want to be in this business. Also it will help you save money to buy your next one.
What determines a good neighborhood? the easy test for me is if you're willing to live there is good. That what i use as my test.
Also how can you evaluate the return of the property? There is a calculator on this website. under resources. I would want to make at least $100 a door after all expenses.
When looking at possible properties, be sure to think about multiple exit strategies. If things are beginning to go sour, you want to make sure that you won't be stuck with a poorly producing property.