Are you thinking of buying your first short term rental property? If so, you’re probably feeling excited, nervous, confused, and overwhelmed. But don’t worry, that’s normal!
The issue is the sheer amount of information out there that makes the process slightly overwhelming. If you are brand new to the short term rental property market, you will likely need a guiding hand and some useful information to help you decide your next step.
Below are our steps to buying your first short term rental property. We hope the information enlightens you, answers all the important questions, and places your worries at bay.
Steps to buying your first short term rental property
In this article, we will provide you with 15 essential steps to help you buy your first rental property. Your buying journey should be pleasant, and to make it so, it is essential to be informed every step of the way.
1. Ask yourself, “is buying a short term rental property right for me?”
Buying a short term rental property is a great way to earn extra income, grow your wealth, and benefit from long-term appreciation. But it’s not for everyone. Buying a short term rental property has its challenges and before committing to the journey, do ensure you’re ready to face them:
- Time - even with a property manager, owning rental property requires time and requires you to be actively involved.
- Capital - rental properties require more capital than buying your own home. Make sure you have enough money for such an investment.
- Unpredictability - you can make high income via a rental property, but it isn’t always lucrative, as there are many unpredictable elements to consider.
If you still feel optimistic despite the drawbacks listed above and feel confident you can deal with the challenges, then you’re in a great position to buy a short term rental property. If not, then don’t worry, there are plenty of other ways to invest in real estate.
2. Define your end goal
Knowing what you want to get out of your rental property will determine the best deal for you. Do you want early retirement? Do you need an immediate cash flow? Are you diversifying your portfolio?
These questions are essential to answer at the beginning of your journey. The answers will ultimately inform better investment decisions and help you set achievable financial priorities and goals.
3. Build a team
Going on this journey alone is near impossible. You want to build a team of people and professionals who will help you make your rental property investment a success.
Surround yourself with professionals (like The Short Term Shop) who have experience buying and managing short term rental properties and who can guide you through the process. This will save you time, money, stress, and energy.
4. Know your expenses
When buying a rental property, you will most likely accrue expenses, including property taxes, unexpected repairs, and maintenance fees. Therefore, you will need a rainy day fund.
Make sure you calculate these expenses before you get started and have the funds in the bank, so that you can be prepared for the unforeseen.
5. Get organized and track your progress.
Buying a short term rental property is a big project that requires organizational skills and tracking. Use project management software or an Excel sheet to keep everything organized. Take notes during meetings, set reminders for important tasks, and store relevant emails and documents.
When problems arise, and they always do, it’s recommended to have everything in one place so that you can quickly resolve them. Keep a centralized system for all the information you find.
6. Get support
Your property manager (if you hire one, you don’t need one by the way, but that’s a topic for another article) is extremely useful, but so is a friend or a loved one. If things feel overwhelming or confusing, ask a friend or family member to assist you. If you’re buying with a spouse, work on this project together.
You can delegate part of the work to others, so that you can focus on what's important and stay on track.
7. Get pre-qualified, as soon as you can
Getting pre-qualified is the most important step when buying a rental property. It will help you to understand what type of property you can afford. You will need the following to get pre-qualified:
- Credit score of at least 680
- Job history of two years at a US company or 3-5 years of self-employed history
- Have the full down payment and six months of expenses in cash
- Favorable debt to income ratio
8. Do your short term rental market research
When it comes to buying the right short term rental property, research is everything. The more research you do and the more questions you ask, the greater knowledge you will have to make the best decision for your desirable future.
Foremost, think about travel, tourism growth, local attractions, city gentrification, transformation, and infrastructure changes in the area of investment speculation. These are all common signs of a good investment if each factor seems strong.
9. Do your own research
Don’t let others convince you of a suitable location or property. Do your own due diligence and be confident in your own decision about what constitutes an excellent opportunity.
For example, look at the possible neighborhoods in finer detail. Ask yourself important questions like:
- “Does this locality have high tourism traffic?”
- “What are the local amenities?”
- “How many other rental properties are in the area?”
- “What is the average income in the area?”
Go through all the details with a fine comb to make the best decision possible.
10. Consult with other landlords
Once you have chosen an area, set up a time to meet and talk directly with local rental property owners or landlords with significant portfolios.
Ask them what they think is the average rental price for the area for different types of property. Ask them for advice on how they got started, how they improved their portfolio holdings and any other questions you may have about the process.
11. Organize an inspection before you buy the property
An inspection will cost you a couple of hundred dollars but can save you thousands. An inspection will help red flag any infrastructural or underlying issues with the property that can help you make a wiser decision that you won’t regret. You can also use minor issues as leverage to negotiate a better deal with the property owner.
You can even agree to have specific work done before you make the purchase. An inspection will save money, time, and many other problems down the line.
12. Check the pro forma
A pro forma is a projection of the property’s cash flow, which will help you to determine the monthly income, expenses, and any taxes. This will help you make a better decision on the price you pay and give you some insight into the property’s potential as an investment. Not all sellers will have a proforma, so you may have to create a projected proforma yourself.
13. Get a valuation of the property
Just because the owner is selling for $250K doesn’t mean the property is actually worth that price. An evaluation may find that it’s actually only worth $230K. A property valuation from your realtor will help you negotiate the cost of the property and possibly save you tens of thousands of dollars.
14. Organize your financing
There are plenty of ways to finance the purchase of a rental property. Finding the best finance option for you is crucial and will be largely determined by your goals. Do you want quick, positive monthly income or are you playing the long game of appreciation?
As a general rule of thumb, the higher your monthly mortgage repayment, the lower your monthly income will be from the rent. If you’re smart and buy in a great area, you might just be able to count on making a good monthly income as well as profit from long-term appreciation.
15. Make an offer
The last thing to do is make an offer on the rental property you wish to purchase. Once you have a deal, you need to ensure it gets closed as soon as possible and before the agreed upon deadline.
A property manager can help you get everything sorted in an organized manner. You should also have a good idea of what you need to do to get the property ready to be rented. Finally, it will be time to find the right tenants and start enjoying the rewards of your investment!
Buying a short term rental property is one of the most exciting and nerve-wracking investments one can make. The recipe for success is simply doing plenty of research and due diligence. If you ensure you have all the information to make the right moves, then you increase the chances that your investment will be all that you’d hoped it would.
Getting support for your first rental property purchase is a good idea. Here at The Short Term Shop, we can help you with everything, from the initial idea, to the point of purchase, to training you to manage your short term rental property without having to hire expensive property managers. Simply contact us at 800.898.1498 or email us at [email protected] to speak to one of our professional team members. We look forward to assisting you!