Guide to Buying Your First Rental Property

Interested in buying a rental property? At Modern Lending, we understand the fears that come with investing in real estate which is why we hope to provide our customers with our first rental property guide. Whether you have done it before or are a beginner, here are some investment property financing tips that will help you in your future rental property investment.

1. Why Invest in a Rental Property? 

Tax benefits for real estate investors:

There are a plethora of benefits that arise from investing in a rental property. To begin, the Internal Revenue Service (IRS)  allows you to deduct expenses that are connected to your rental property such as: ordinary/necessary expenses, improvements and depreciation. If you choose to rent out your property seasonally, you can still deduct your expenses.

When investing in a rental property, long-term wealth building and passive income is established along appreciation and equity growth. 

2. Choosing the Right Location for Your First Rental Property 

Choosing the right location is key to the success of your rental property investment, depending on location, the housing market can fluctuate. Modern Lending cares about recommending our clients the best location for your dollar, we care about making sure you are up to date on real estate market research.

Listed below are some of Modern Lending's past blogs on the Airbnb Market:

Top 5 Airbnb Markets under $600K

Investing in Airbnb

Calculating Airbnb Earning

There are many factors to consider when renting a property including: job growth, rental demand and crime rates. Comparing and contrasting how urban vs. suburban vacation rental markets and researching property appreciation trends is how Modern Lending works to ensure our clients know what they are investing in.

3. Understanding the Financials: Budgeting and Costs 

When trying to understand the budgeting process of rental property investment it is important to be aware of the various rental property costs. Listed below are some of the key things to consider when understanding the financials.

As far as calculating the potential income that your property will bring in, the above calculation works great. However, there are other expenses to take into consideration, as well. 

In order to calculate the expenses that your property will cost you each month, you will need to include your mortgage payment, property taxes, homeowners insurance, HOA fees, software costs, property management fees, as well as the cost of bills, utilities, and supplies for the property. You can omit the cleaning fees for the rental, as Airbnb guests will pay the cleaning fee. For yearly expenses on the property, you should include property planned repairs, furniture wear and tear, and minor decor upgrades. An additional cost that will need to be paid is profit tax. In most places, you need to pay taxes on any profit that is generated from your properties. In order to find the exact amount, you’ll need to look into local laws and regulations. 

Loans with Modern Lending

If you’ll need a loan, look for a loan office that has experience dealing with short-term rental properties, like Airbnbs. As qualifying for and purchasing a short-term rental is completely unique when being compared to purchasing a traditional long-term rental home. It is very important the loan officer understands occupancy rates, average daily nightly rates, markets that are overheated (too much inventory) as well as has a referral network of property managers. This will ensure that everything is properly budgeted and that you are in compliance with local laws when it comes to taking out a loan for a rental property. 

4. How to Finance Your First Rental Property 

Although financing your first rental property may seem daunting, which is why we want you to be aware of all the different loan options available. 

Conventional vs. FHA vs. Portfolio Loans

• Conventional loans  are a popular choice for many real estate investors, offering competitive interest rates and flexible terms.
• FHA loans may be a good option for those who qualify, though they typically require the property to be owner-occupied and might not be suitable for all investment properties.
• Portfolio loans are often offered by local or regional banks and can be customized to suit the unique needs of real estate investors.

At Modern Lending, every single one of our loan officers owns a primary residence, as well as at least one rental property. Working with us ensures that you will be working with a seasoned professional who knows the ins and outs of short-term rentals.