You bought your first rental property, and now you’re addicted. The tenant pays on time, you’ve budgeted well, and everything is going smoothly. Things are working out great, so why not capitalize on the success?
Now that you’re ready to buy a second rental, there are a few things to consider first. Once you’ve had success, it’s tempting to forget all the work that went into making the rental successful from the beginning. So consider these four tips before you start shopping for your next property.
1. Don’t venture from the guidelines.
Rental properties only profit when you buy the right one. We give you a set of guidelines to follow as you start looking for a property. You bought your first rental based on similar considerations of goals, budget, and location. That’s part of the reason it’s successful. As you look for additional property, don’t veer from these rules. If the next rental is successful, it’ll be for the same reasons, so stick with what works.
2. Search in the same area.
It helps to have your properties near each other. Again, the first property is working well in that area, so another property will likely profit there too. Plus, properties in close proximity make ownership more convenient in the long run.
3. Make sure cash flow is profitable.
Cash flow is king. So know your numbers before you buy. (Related: How to Determine If Your Investment Property Will Produce Cash Flow) Calculate not only the cost to get the house rent-ready, but also the rental rate, maintenance costs, debt service fees, vacancy expenses, and then final net income. The real numbers show if a purchase makes financial sense.
4. Form a big picture strategy.
How many properties do you plan to buy in the long term? If you plan to own more than two properties, decide exactly how many you want. Then, as you meet with bankers, you can choose a financing option that makes future opportunities possible.
Also, investigate the tax advantages that come with multiple properties. Deductions for costs associated with advertising, cleaning, maintenance, HOA fees, insurance, legal fees, mortgage interest, taxes, and utilities multiply quickly as you accumulate property. And saving in taxes is always a good thing!
Ownership structure may change with more properties as well. Depending on your long-term goals, consider incorporating as an LLC. Under this structure, you’ll avoid double taxation while protecting your personal assets from legal claims. There’s also an option to open an LLC for each property. Discuss these options with your legal counsel before you buy. If you opt for this, you’ll want to buy the house under the LLC rather than transfer the mortgage later.
Don’t just do whatever it takes to buy the next property, and then think about others later. Instead, plan three or four houses ahead, calculate hard numbers, and follow the rules about what works. Rental investments bring major returns when you’re smart with your purchases. No matter how many properties you buy, take each purchase seriously so you set yourself up for long-term success!
I really like your advice to form a “big picture plan.” I think that a lot of people get frustrated with rental property because they don’t see the big picture. However, it really can make a big difference to look into what you can do to have a great experience with your rental property. Do you have any other tips about buying a new property?
Any insight as to how much to pay down the mortgage on the first property to before buying a second one? Do you use your first property as collateral on the loan for the second?