Buying Your First Investment Property

Acquiring rental property for the first time doesn’t have to be scary. First-time buyers have several options for owning rental properties.

Updated
October 24, 2022
by

HoneyBricks is on a mission to unlock the potential of real estate investing. We are rebuilding the real estate investment experience, making buying, earning income, and selling income-producing real estate instant, low cost, and enjoyable.

Are you interested in buying a rental property, but not sure where to start? Acquiring a rental property for the first time doesn’t have to be intimidating, especially for investors who do plenty of research. Almost anyone can buy rental property, provided that they understand their options.

Keep reading to get the scoop on buying your first rental property. Find out your options for owning rental units, and get your head around the major pros and cons of owning rental property. 

In this article:

Ways to buy rental property

First-time buyers may perceive that direct, physical ownership is the only option for buying rental property. Owners and investors have multiple options for buying rental property, which can involve either active or passive ownership. Investors have several options to get into real estate investing.

Let’s dig into all the the ways that first-time buyers can own rental property:

Physical ownership

Buyers interested in rental properties can directly purchase a unit and actively manage it to earn rental income. Rental properties can be private residences, multifamily homes, or commercial or industrial properties. 

Physical custody of a rental property is the most direct path to ownership for first-time buyers, and also the most demanding. Directly owning a rental property requires finding and managing tenants, completing major renovations, and managing all financial aspects of owning property.

Those interested in buying rental property need sufficient upfront capital to either purchase or finance the real estate. Many buyers require mortgages to afford a rental property.

Crowdfunded real estate

Buyers can purchase fractions of rental properties by participating in real estate crowdfunding. Crowdfunding platforms fractionalize real estate ownership into shares, with each share representing an ownership stake in a specific property. Many crowdfunding platforms focus on properties with attractive rental income, and pass that income along to investors in proportion to their ownership stakes.

Investing in crowdfunded real estate confers direct ownership but not rights to physical custody. Owners of crowdfunded real estate are passive, meaning that they are not responsible for actively managing the daily operations of the rental property.

First-time buyers can purchase ownership stakes in multiple rental properties using real estate crowdfunding platforms. Buyers are obligated to cede some control to the crowdfunding platform itself, which manages the relationships with real estate sponsors and property managers. 

Tokenized real estate

Buyers interested in directly owning rental real estate can also purchase tokenized real estate. Real estate tokens, which use blockchain technology, signify direct ownership of real estate that’s been tokenized. Most tokenized real estate is also fractionalized, although real estate tokens can indicate 100% ownership of a property.

Buyers of tokenized real estate are passive owners who do not have responsibility for the operational aspects of a property. Token holders of rental property receive a portion of the property’s rental income in proportion to their token holdings. Blockchain technology enables real estate sponsors to connect more directly with real estate buyers, using real estate tokens to transact in a way that is transparent, efficient, and secure.

First-timers interested in owning rental properties can use a real estate tokenization platform like HoneyBricks to access tokenized real estate offerings. Real estate tokenization platforms fully support real estate tokens without taking custody—token buyers hold their own real estate tokens in compatible digital wallets.

Pros and cons of buying rental property

Buying rental property has both advantages and disadvantages, for both first-time buyers and seasoned landlords.

These are some of the major pros and cons for rental property owners:

Pros 

  • Attractive income potential: Rental property is known for producing stable income streams over long periods of time.
  • Portfolio diversification: Adding rental property to your portfolio can be a smart way to diversify your assets. if you own a lot of stocks, for example, then you may want to add a different asset class like rental real estate to your holdings.
  • More financing options: The reliability of rental income can make it easier to finance a rental property. Banks may be more willing to lend against an income-generating asset like rental property than a private residence.

Cons

  • High initial investment: Buying a rental property outright generally has a high upfront cost. First-time buyers need at least enough cash for a down payment.
  • Landlord duties: Directly owning a property requires taking responsibility for its operations. Buying and managing a rental property can have a steep learning curve for first-time landlords.
  • Limited investment liquidity: The liquidity of a rental property under direct ownership is generally low. Owners are required to sell their properties to exit their holdings.

How to get started with buying rental property 

As a first-time buyer of rental real estate, you may be wondering about how to get started.

Let’s take a closer look at the basic steps to follow for this type of real estate investing:

  1. Review your current assets. Your first step is to evaluate what you already have, which may include investments in real estate. As a first-time buyer of rental property, you may not own any tangible property—at least not currently.
  2. Evaluate your priorities. When it comes to owning rental property, what matters to you the most? Maybe you are concerned about maximizing your investment returns, or perhaps you value the convenience of passive real estate investing. Your second step is to determine exactly why you want to buy rental property.
  3. Develop a strategy. With your priorities top of mind, it’s time to develop a specific strategy for buying rental property. If you want to directly own a rental asset, then you also need to create a plan for managing the operational aspects of the property.
  4. Execute your strategy. Whenever you feel ready, you can execute the strategy that you’ve developed. Your chosen approach to buying rental property determines exactly what’s required at this stage.
  5. Monitor your holdings. With your purchase or purchases complete, you can begin to monitor your rental properties. If you have physical custody of a rental property, then you also need to put your operational plan into action.

Should you buy rental property?

As a first-time buyer, you may be hesitant about purchasing rental property. Many investors are attracted to the cash flows associated with rental real estate, but are unprepared to be landlords for demanding tenants. Prospective buyers need to conduct plenty of research to explore their options before plunking down any of their hard-earned money. 

About the Author

Allie Grace Garnett

Allie is a financial writer, editor, and content strategist with a background in traditional finance. She has contributed to publications including Investopedia, The Motley Fool, and The Balance.

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