Every Real Estate Question You Should Ask When Buying a Rental Property

Making the decision to invest in real estate is a major commitment, both financially and in terms of the responsibilities of being a landlord. It's a good idea to be curious, asking questions so that you can develop a solid understanding of the type of commitments required and determine what's the best fit for you.

However, the work doesn't stop once you buy your first property. We'll also cover the operational aspects of being a landlord, like tenant screening, creating legally sound lease agreements, following landlord-tenant laws, and managing maintenance and repairs.

Ready to take that first step into real estate investing? Use these questions and answers as your guide to strategically buying and running rental properties with confidence, allowing you to achieve your ultimate goal of building wealth.

Finding the right property

Once you're ready to invest in the real estate market, here are the types of questions you'll likely be asking yourself.

What type of property should I invest in?

One of the first decisions you'll need to make is whether to purchase residential or commercial property. Residential properties include single-family homes, condos, townhouses, and multi-family units. These properties typically require a smaller initial investment and tend to be easier to manage, making them ideal for new investors.

Commercial properties like office buildings, retail spaces, and warehouses, on the other hand, demand a larger initial investment and a deeper understanding of business needs and commercial real estate laws. However, they can offer longer lease terms, which provide more predictable, stable income.

Both types have their merits and challenges, so your choice should align with your investment capacity, management preference, and financial goals.

How do I determine a good location for investment?

To find a good location for your investment property, you should look at things like:

• Economic stability: Choose a housing market with strong job growth and ongoing economic development. These local market conditions attract more residents and support higher property values and rental rates.
• Population growth: Look for signs of population increase, such as new infrastructure projects or expansions in public services. These demonstrate a growing demand for housing in the local real estate market you choose.
• Real estate market trends: Understand local real estate supply and demand characteristics. Property prices are higher in a seller's market with limited inventory, which impacts your investment returns. A buyer's market with ample supply presents opportunities for attractive returns, but there could be underlying reasons for the oversupply, which may affect long-term property values.
• Neighborhood quality: Consider the quality of local schools, crime rates, and access to amenities like parks, shops, and public transport. Good schools and low crime rates especially enhance property appeal.
• Future development: Be aware of any planned developments or zoning changes in the area that could affect property market value or future buyer demand.

Where do you find good opportunities?

Once you've decided on a location, the next hurdle is finding a solid opportunity that actually makes financial sense. No one wants to overpay on a dud investment that won't make them any money, right? When hunting for those amazing and lucrative real estate opportunities, there are a few different angles you can take.

Working with a real estate broker can get you access to properties on the local MLS, or, if your real estate agent network permits, you can connect with agents peddling unlisted pocket listings.

Another approach is networking with wholesalers to get a line on off-market properties or building relationships with other investors already in the game who can tip you off to killer deals. Tapping into more channels improves your chances of landing a profitable investment opportunity in your target area.

What are the key financial metrics I should consider?

Once you've got an investment opportunity lined up, it's time to put on your number-crunching hat. These are the key investing metrics you'll want to look at during the home-buying process:

• Net operating income (NOI): This is the total income generated by the property minus operating expenses (not including mortgage payments).
• Capitalization rate (Cap rate): This metric helps assess a property's return on investment. Calculate it by dividing the NOI by the current market value of the property.
• Cash flow: This is the net income after all expenses, including mortgage payments, have been paid. Positive cash flow indicates that the property is generating more income than it costs to maintain and finance.
• Cash-on-cash return: This rate measures the cash income earned on the cash invested in the property. You can calculate it by dividing the annual pre-tax cash flow by the total cash invested. This metric helps investors evaluate the effectiveness of their investment.
• Debt service coverage ratio (DSCR): This ratio compares the NOI to the annual debt service (the total amount of principal and interest payments for the year). A DSCR greater than 1 indicates that the property generates enough income to cover its debt obligations.
• Return on investment (ROI): This metric quantifies the impact of your real estate investment. To calculate, take the total costs, like down payment and closing costs from the net profit, then divide by the total investment. Multiply by 100 to express it as a percentage.

The buying process

So you've found a potential investment property and are working to make it yours. During the buying process, here are the questions you'll want to ask yourself.

Should I order a home inspection?

Ordering a home inspection is always a good idea. Inspections can reveal potential issues that might not be apparent at first glance, such as structural problems, outdated electrical systems, or plumbing issues.

Your buyer's agent should be able to recommend some solid inspection companies to bring in and identify any problems early on. This gives you a chance to either negotiate a better price if there are major issues or just walk away from a total lemon of an investment.

What are the financing options available for real estate investors?

When it comes to financing your rental property, you've got a few different options to choose from depending on the type of deal and your specific situation as an investor:

• Conventional mortgage: These are traditional bank loans that usually require a down payment of 20-30% of the property's purchase price for investment properties. They have stringent credit score and income requirements. Conventional loans for investment properties do not offer the same options as those for primary homes, like private mortgage insurance (PMI) or the ability to put less than 20% down.
• FHA or VA loan: If you're purchasing an investment property containing 4 units or less and you live in one of them, consider using an FHA or VA loan. These loan types provide the advantages of lower down payment requirements, favorable interest rates, and more flexible credit score criteria.
• Alternative options: Hard money loans from private lenders are a short-term option that's ideal for investors who need quick funding despite higher interest rates. You can also use home equity loans or lines of credit against the equity in your existing property to finance rentals.
• Commercial loans: These loans are more complex and have different qualifying criteria and terms than residential loans.

How can I estimate the potential rental income from a property?

To estimate the potential rental income from a residential property, you can do a comparative market analysis for other properties in the same area.

Look at listings on real estate websites and consult local real estate agents or property management companies. You can also use Azibo's Rent Estimate Calculator to find out the going rates for similar homes in terms of size, condition, and location.

How does real estate investment impact my taxes?

Real estate investing has a significant impact on your taxes, so you'll want to familiarize yourself with how it all works. Knowing the ins-and-outs of taxes allows you to maximize your returns while keeping it all above board and compliant.

• Rental income: You must report the income you receive from tenants as part of your annual income, and it is taxable.
• Deductible expenses: You can deduct a variety of expenses associated with operating and maintaining your property.
• Depreciation: This is one of the most significant deductions for real estate investors. Depreciation deducts the costs of buying and improving a rental property over its useful life.
• Capital gains: When you sell a rental property for more than its depreciated value, you'll likely owe capital gains taxes on the profit.
• 1031 exchange: Under IRS Section 1031, you can defer capital gains taxes on the sale of a property if you reinvest the proceeds into a similar property.

Operating your rental property

Once you own the rental property, the real work starts. The following are the kinds of questions we regularly get from owners about keeping their rental operations running smoothly day-to-day.

What are the ongoing costs associated with owning a rental property?

Owning an investment property involves several ongoing costs, including property taxes, insurance, maintenance, and repairs. You should also budget for potential vacancy periods when the property may not generate rental income.

What are the legal considerations I need to be aware of as a landlord?

As a landlord, you need to be aware of several specific legal considerations:

• Landlord-tenant laws: These local and state regulations govern rental properties and outline landlords' and tenants' rights and responsibilities.
• The Fair Housing Act: This federal law prohibits discrimination against tenants based on race, color, religion, national origin, sex, disability, or familial status.
• Lease agreements: Be sure that your lease agreement is legally binding and compliant with local laws.
• Eviction rules: Understand the legal procedures for eviction, which require proper notice and legal justification.
• Security deposit regulations: Follow state laws on how much you can charge for a security deposit and the timeline and conditions for returning it post-tenancy.

What kind of insurance will I need?

For an investment property, you'll need specific types of insurance to protect your asset and minimize financial risks:

• Landlord insurance: This covers property damage, liability in case someone gets injured on your property, and loss of rental income due to damage that renders the property uninhabitable.
• Property insurance: Covers damage to the building from fire, storm, theft, and other hazards.
• Liability insurance: Protects against claims of property damage or injury sustained by tenants or visitors to the property.
• Umbrella policy: This policy provides additional liability coverage beyond what's provided in your standard policies, offering extra protection.

Should I manage the property myself or hire a property manager?

Deciding whether to manage a property yourself or hire a property manager depends on several factors. If you have the time, skills, and desire to handle day-to-day management tasks, self-management can lead to sizable savings.

However, if you own multiple properties, live far from your investment, or prefer not to deal directly with tenant issues, hiring a property manager can be a wise investment.

How do I find reliable tenants for my property?

To reach a wide audience of prospective tenants, start by advertising your rental listing on popular real estate websites, local classifieds, and social media platforms.

Once you've generated interest, properly screening applicants is key to finding reliable tenants. Have prospective renters fill out an application with all their personal details, rental history, job info, and references. Then, use that information to run a credit and background check.

Always get the prospective tenant's written permission to conduct these checks in order to comply with the Fair Credit Reporting Act and other relevant laws.

What criteria should I use to screen tenants?

Establishing a list of criteria you'd like to screen tenants for in advance can save you time in the future and ensure that you avoid engaging in discriminatory screening practices. These are the areas you'll want to evaluate:

• Income stability: Generally, look for tenants whose monthly income is at least three times the rent. This indicates they can comfortably afford the rental.
• Credit score: A good credit score (usually above 620) demonstrates financial responsibility and a history of paying bills on time.
• Rental history: Check for positive references from previous landlords, including timely rent payments, proper property maintenance, and fulfillment of lease terms.
• Employment verification: Confirm the tenant’s employment status and income stability through recent pay stubs or an employment letter.
• Criminal background: A criminal background check can help you avoid tenants with a history of behaviors that might be a risk to property safety or community security.
• Eviction history: Avoid tenants with a history of evictions, as this could indicate problematic behavior or financial instability.
• Pet policy: Decide if you will allow pets and what types, sizes, or breeds are acceptable based on property policy and insurance.

What should be in the lease agreement?

Your lease agreement is going to be the backbone of how you manage your rental property, so you'll want to make sure you pay meticulous attention to every piece of the document. Make sure that these elements are covered in your lease:

• Parties and property: Include details of the landlord, all tenants, and a full description of the property.
• Terms and payments: Define the lease duration, monthly rent, due dates, and payment methods. Outline security deposit terms and conditions for return.
• Responsibilities: Clarify which utilities and services are tenant responsibilities and specify maintenance obligations for both parties.
• Rules and conditions: Address property rules regarding noise, guests, pets, and parking. Include compliance with local regulations and standards for health and safety.
• Legal clauses: Make sure all terms comply with federal, state, and local laws, including anti-discrimination policies and eviction procedures.
• Signatures: A legally binding agreement requires the signatures of all parties involved.

How often can I increase the rent, and by how much?

The frequency of rent increases and allowable rent increase amounts largely depend on local landlord-tenant laws and the specific terms outlined in your lease agreement. In general, you can implement rent increases upon lease renewal for most residential leases without rent control. You should provide notice to tenants, typically 30-60 days prior to the renewal or expiration date. The amount you raise the rent is generally at your discretion.

In areas with rent control or rent stabilization regulations, the rules on rent increases are much more stringent. These laws limit how much you can increase rent. They also often dictate the allowable timing for increases, usually tying them to a cost-of-living index or a set percentage defined by the local rent control board.

What are my responsibilities and duties as a landlord?

As a landlord, you have several key responsibilities and duties to verify your rental property's safety, legality, and profitability. These include:

• Maintaining the property: You'll need to make sure the property is safe and habitable at all times. This involves regular maintenance, prompt repairs, and compliance with all applicable building codes, health ordinances, and safety standards.
• Respecting tenant privacy: Your tenants have the right to privacy. You must give proper notice before entering their rental unit, typically 24 to 48 hours, unless there's an emergency.
• Following lease agreements and local laws: Adhere to the terms of the lease agreement and local landlord-tenant laws.
• Handling security deposits: Collect, hold, and return security deposits according to state regulations.
• Providing essential services: Confirm that all utilities and services stipulated in the lease are in working order.
• Verifying non-discrimination: Comply with fair housing laws that prohibit discrimination based on race, color, national origin, religion, sex, familial status, or disability.
• Evicting tenants legally: If eviction becomes necessary, follow the legal procedures to keep the process as fair and compliant as possible.

How do I handle maintenance and repairs?

For maintenance and repairs, being proactive is key. Don't wait for things to break down to act — conduct regular inspections and preventative maintenance to keep small problems from growing into expensive repairs.

In addition, make sure your tenants have an efficient way to report maintenance issues at their disposal. When tenants submit repair requests, respond quickly to keep the property in good shape and your renters happy.

For more complex repairs, hire qualified professionals who are licensed and experienced to verify the quality and safety of the work. Be sure to keep records of all maintenance and repair activities, including dates, costs, and descriptions of the work performed.

What should I do if a tenant does not pay rent on time?

If a tenant does not pay rent on time, start by sending a polite reminder. If this doesn't result in payment, issue a formal notice as specified in your lease agreement. If non-payment persists, refer to your local laws on how to initiate eviction proceedings.

What are the legal procedures for evicting a tenant if necessary?

To legally evict a tenant, start by providing a formal eviction notice that complies with local laws, detailing the reason, such as a lease violation or non-payment of rent.

If the tenant fails to resolve the issue within the specified timeframe, file an eviction lawsuit with your local court. After obtaining a court order, a sheriff or constable must carry out the eviction, not the landlord.

The most frequently asked real estate questions, answered

This guide has covered the key questions new investors tend to ask, helping you prepare for your new endeavor, but being a successful real estate investor involves rolling with the punches. Markets, regulations, best practices — they're always evolving. So stay on your toes, and don't be afraid to contact experienced professionals for the latest information.

You'll also want to revisit your strategies regularly to find new money-making opportunities while covering your bases against potential risks. Real estate investing is rarely a perfect straight line; it takes patience and a willingness to keep learning as you go.

The goal is to build a portfolio that aligns with your bigger financial picture. With the right preparation and smart execution, real estate can generate wealth and leave behind a legacy investment that keeps paying out for generations.

Real estate common questions FAQs

What is the most googled question about real estate?

The most googled question about real estate is often "How much house can I afford?" To answer this question, you'll need to evaluate your investment goals and financial situation.

What is the hardest part of real estate?

The hardest part of real estate is often finding the right property at the right price, especially in competitive markets.

What is the biggest problem in real estate?

The biggest problem in real estate is typically the lack of affordable housing in many markets, coupled with fluctuating market conditions that can affect property values and investment stability.