Texas is one of the best states to buy and own rental property, thanks to its growing population, flourishing economy, and landlord-friendly real estate laws. This leads many people to ask themselves, should I invest in rental property?
Whether you’re a first-time property investor or are looking to expand your portfolio, buying a rental property in Texas can be an excellent long-term investment opportunity. However, owning rental property may not be for everyone.
Owning rental properties can bring in additional monthly income, and there are certain tax benefits to owning real estate. The downside is, buying rental property requires a large amount of upfront capital that not everyone has.
Investing in rental property is a big decision. Keep reading to learn what you need to know about buying rental property in Texas and if it’s the right investment for you.
What to Consider Before Looking at Investment Properties
Before you start working with a real estate agent to begin your income property search, it’s important to consider all the factors involved with becoming a landlord. Ask yourself these questions to determine whether or not you’re ready to buy a rental property in Texas.Do You Have Enough Resources?
Just like with buying a residential property, it’s important to ensure you have sufficient resources when buying a rental property. It’s important to budget for the house cost itself, as well as the other costs associated with a rental. Texas does not have a state property tax, but you will need to factor in property maintenance, utilities, insurance, and unexpected emergencies.Can You Acquire Financing?
Once you determine your available resources, you will have to decide whether you will need to finance the property. Unless you have enough for a cash offer, any rental property you want to buy will need a loan. Both options have their pros and cons: while buying with cash frees up your monthly payments, you may tie up all your funds and struggle with other out-of-pocket expenses. You may also miss out on the opportunity for mortgage interest deductions when it comes time to file your taxes. Like with a residential mortgage loan, you will need to get pre-approved for a mortgage and have enough funds for a down payment. The required down payment for rental properties is typically higher than when buying a primary home. Expect to put down between 15% and 25%, depending on the loan. Your three main options for financing a rental property in Texas include- Conventional loans via banks and traditional mortgage lenders
- Hard money loans with products specifically for real estate investors
- Joint ventures where other investors pool their money together to purchase a property
Can you Get Pre-Approved?
At the Davis Real Estate Group, we always recommend buyers get pre-approved before they begin the home-buying process, and the advice still stands for investment properties. A mortgage pre-approval will give you an idea of how much you can borrow to buy a rental property in Texas and will show the interest rates and terms you qualify for. When competing with other buyers and investors in a hot market, it’s important to show that you’re a serious and reliable buyer. Are You Ready to be a Landlord? Whether you’re looking to outsource all work to a property manager or plan on maintaining the property yourself, investing in income properties makes you a landlord. You may need to learn new skills such as bookkeeping, plumbing, and landlord and tenant rights once you begin renting your property.Location is Important for Buying a Rental Property in Texas
If you’ve determined that investing in income property is the right choice for you, it’s important to research locations and find the right property for you. For real estate investors, choosing a location is about more than just finding a neighborhood that appeals to you. You need to find an area that makes sense with the overall rental market. Here are some things to consider when scouting locations:- Rental-to-ownership ratio: neighborhoods that are primarily owner-occupied may not attract renters.
- Vacancy rates: similarly, areas with high vacancy rates may not attract renters.
- Schools: rental properties in an area with good schools may receive more interest, especially if it’s a single family home for rent.
- Amenities: a neighborhood with desirable amenities will naturally attract more renters.
Finding the Right Investment Property
In addition to finding the right areas to buy a rental home in Texas, you want to find the right properties. One thing to consider is whether you want to invest in a single-family home or a multi-family home.
Single-family homes are generally a better place for first-time landlords to start. With a single-family unit, you will only need to worry about one set of tenants, allowing you to better ease into your new role as landlord.
Multi-family properties, on the other hand, can range from duplexes to properties with 100 units. If your goal is to have multiple rentals, multi-family units give you scale without needing many loans for separate properties. While owning multiple units is additional work and often requires more upfront capital, you benefit from multiple revenue streams.
Keep in mind that your preferred location may play a large role in determining the best type of investment property, as do demographics. Some of the most desired locations in the North Dallas area, for instance, are mostly single-family homes.
For example, families looking to move to Wylie, Texas, will likely expect to rent single-family homes rather than units in an apartment building. Young professionals looking for rentals in the heart of Dallas, on the other hand, will have different expectations.
When it comes to owning rental property, you want to ensure that your home or units are desirable places to rent for your target demographic.