Adding another property to your rental portfolio means doubling your rental income and increasing your cash flow. It can also be a great way to diversify your investments by venturing into other real estate ventures. For example, if you own a long-term rental you could try expanding your small real estate business with another apartment in a different location, or branch out altogether by getting a vacation rental. However, buying another property also means increasing your workload as a landlord. Without careful planning, property management could suffer on both ends, especially if you still have a full-time job. With several factors to consider, we've put together the do's and don'ts of buying a second rental property so you can make more informed decisions:
Do's of Buying a Second Rental Property
Research the Location
Prioritize high-demand areas when shopping for your new rental. Location is one of the most important factors that influence the success of your real estate business, so it's crucial to find the right neighborhood. On one hand, tenants are more likely to stay away from areas with high crime rates or far from amenities like public transportation. And even when you do find renters, there are higher chances of tenant turnover making your cash flow inconsistent. In contrast, landlords who invest in high-value properties are more likely to find high-quality tenants willing to pay more for their proximity to amenities and safety.
Aside from what tenants find attractive in your property, you must also pay attention to the property taxes. High-income neighborhoods often have higher taxes which can eat into your profit, so you could also consider investing in upcoming areas with lower taxes. In addition, their property values are more likely to increase significantly over time, which can boost your profits in the long run.
Look for Financial Options
Explore various financing options before committing to a mortgage. Instead of signing a deal with the first bank that gives you funding, shop around to see if you can get better terms elsewhere. How you finance a property can easily make or break your investment's success. If you opt for a loan with steep terms you could end up losing your profits due to high interest rates, hidden charges, or late penalties. A reasonable loan should provide you with the capital you need without draining your profits during the repayment process.
Thus, it would be best to compare interest rates, down payment requirements, and loan terms from different lenders. Since it's your second property, you may also want to consider other options such as refinancing your first property or using a home equity line of credit (HELOC) to fund it.
Consider Hiring Property Management
Get an extra hand by hiring an expert property manager. Rather than trying to burn the candle at both ends, it would be best to outsource some of your property management duties to a third party. After all, why try to juggle time-consuming tasks like tenant screening and rental repairs for two properties when you can get professional help? Work with a proactive Northern Virginia property management company to handle leasing, maintenance, and other tenant concerns.
Don'ts of Buying a Second Rental Property
Overlook Hidden Costs
Remember to factor in the hidden costs of buying a rental property. If it's been a while since you purchased your last house, or you're planning on investing out of state, you need to get an accurate estimation of the property's real cost. Many investors often forget that sellers only advertise the sales price, and that tag doesn't include expenses such as property taxes, insurance, maintenance, or utilities. As a result, you might have to stretch yourself thin and compromise on quality renovations or marketing, which can impact the rental's success.
Expand Portfolio Without Property Evaluation
Don't purchase a property without a thorough inspection and evaluation to assess its condition and potential value. After all, the last thing you want as a property owner is to realize you need a major renovation you didn't budget for after you've already collected the title deed. A thorough evaluation of the property's condition can tell you a lot about whether the house is worth investing in and if it'll be a worthy expansion to your portfolio. Besides, knowing how much work you need to put into the property to make it liveable can also help you plan your exit strategy. Paying off a mortgage early can give investors an edge when it comes time to expand their portfolio by reducing their debt-to-income ratio and increasing their cash flow.
Failure to Establish a Long-Term Strategy
Have a clear plan for your rental property investment to ensure you stay on track. It's not enough to expand your portfolio with another property for the sake of it. Aside from running the risk of mismanagement, working without a plan doesn't allow you to maximize the property's full potential. For example, if you decide to purchase a property in a neighborhood with strong homeowners associations and renovate it into a short-term rental, you could have some issues with your HOA if they have policies against short-term leases. So you need to decide if your goal is to invest in short-term rentals which would require looking for another neighborhood, or adjusting your rental agreement to accommodate longer leases so you can invest in a prime location.
Conclusion
Never jump into buying another house without careful planning and consideration. Besides increasing your income, expanding your real estate business has many perks such as diversifying your portfolio. However, if you bite off more than you can chew, you could end up overextending your finances and time. So prioritize your property's location by opting for houses in areas with high occupancy rates. In addition, you can also hire an expert property manager who can help you streamline your operations and avoid burnout.
Remember to consider the hidden costs of buying a second rental as well. Too many investors get caught up in the asking price and mortgage fees, but forget renovation and maintenance expenses also count towards your total. That's why it would be best to conduct a detailed property evaluation so you can expand your portfolio without hiccups and in line with your long-term strategy.
