How to Buy a Home for Rental Purposes

Not all rental properties provide profit for the owner.

Rental homes allow renters an opportunity to live in a larger residence, with options for yard space for children or dogs, even though the family doesn't have the down payment to buy a home. The strength of the rental market depends on a number of factors, including the availability of rentals in the region and the mortgage interest rate for investment purchases. With the exceptions of major urban centers such as San Francisco and New York City, the amount for rent for homes varies widely during the year and with the geographic rental region.

Things You'll Need

• Market analysis
• Pre-qualification lender letter

Instructions

1. Determine your budget constraints and the amount required to buy a rental property by meeting with a licensed real estate agent with experience in representing rental property buyers and sellers. Agents with special certifications, licenses or training in working with residential rental homes offer tips to avoid costly mistakes in buying a house. Bring your income and debt information to the meeting.

2. Ask your real estate agent to target neighborhoods for prospective rental properties and begin driving theses geographic areas to select an appealing area that meets your ideal for a rental property. Agents can print out price summaries and rental amounts for local housing regions.

3. Prepare a financial statement for your targeted properties by projecting the income for the rental; the cost of buying and maintaining the property; and the city, state and property taxes due on the income residence. Work with a licensed mortgage broker to prequalify for a mortgage for the rental home. Obtain an official letter from the mortgage broker to use in preparing an official offer on a property.

4. Check local codes, permit requirements and insurance policies for the targeted properties. The property may not meet local standards for rentals and require expensive changes before renting the property. Some houses include dangerous designs, including high diving boards over swimming pools or patios without handrails, excluded by insurance rental properties. Talk with a licensed insurance broker about the potential properties before writing a purchase offer.

5. Write an offer on the property and ask your real estate agent to negotiate the sales contract. Determine your highest offer for the property and remain firm on the amount. Profits on residential rental properties require keeping a close watch on budgets and expenses.

6. Open escrow on the rental property. When the contract sales offer requests repairs or modifications to the property before closing, ask your real estate agent to keep you posted about the progress of the repairs and any new discoveries made during the repairs or modifications that require additional expenses. These conditions might necessitate canceling the sale should the new repairs prove extensive.

Tips & Warnings

• Avoid looking at the rental property as you would a residential home for yourself or your family. The best rentals match market and rental trends and not your personal taste.

References

• Orange Coast Title Escrow Services: How Does the Escrow Process Work?
• MSN Real Estate: Now Is a Great Time to Invest in a Rental
• JSOnline: Building Code Violations Pile Up Again at Holloway's Apartments
• City of Houghton Housing Code Rental Properties: Chapter 14 -- Buildings and Building Regulations
• City of Iowa City: Permits and Licenses