Know the drawbacks to know before you invest. Should You Hire a Property Manager? Take the first step towards building real wealth by signing up for our comprehensive guide to real estate investing. Investing in rental properties is a great starting point for real estate investors. Rental properties can provide cash flow and generate value from appreciation. Investors also get tax incentives and deductions from owning real estate.
While it can be a lucrative method of real estate investing, there's a lot to know before investing in rental properties. This comprehensive guide will show you how to start investing in rental properties as a beginner.
We'll go over what it takes to invest in rental properties, common mistakes to avoid, and things to know before you buy your first rental. A rental property is a residential or commercial property that's leased or rented to a tenant over a set period of time.
There are short-term rentals, like vacation rentals, and long-term ones, like those under a one-to-three-year lease. Residential rental properties are often more accessible to beginners because they're less expensive. Less money is required upfront and that often means that it's easier to get financing. While there are exceptions, residential rental properties are also typically easier to manage.
In most cases, managing one tenant is easier than managing twenty. For these reasons, this comprehensive guide to investing in rental properties is focused on residential rentals. Most investors buy a rental property with the goal of producing positive cash flow -- earning more income each month than they spend on expenses. Not every rental has a positive cash flow at first, but building up to one is a common goal of rental investing.
Owning a rental property is an active form of real estate investing and requires time, dedication, and involvement. Being a landlord isn't for everyone. As you'll see, there's much work involved in identifying, analyzing, buying, and managing a quality rental property. Do you think investing in a rental property might be a good idea for you? Keep reading to find out where to start and how to best prepare yourself for the project at hand.
Beginning real estate investors often want to purchase rental properties in their backyard. That could mean in the same ZIP code as their current residence, the same city, or the same state. However, this may not be an option depending on the market you live in, nor is it always the best choice. If you live in a neighborhood where property values are on the upper end of the market, rent may not support a positive cash-flowing rental property.
You might not have the funds available to buy a rental property nearby. If that's the case, look in other markets for your first investment. While it may be easier to manage a rental that's only 10 minutes from your home instead of two states away, you can invest in any market.
If you're not going to invest in your backyard, take a high-level view at other markets, looking for areas that meet these criteria:. There are several free and paid resources to help you conduct market research on various areas of the country, including our own guide to the best places to buy rental property in Use them for information on the economic growth, housing demand, vacancy rates, average income, and average housing prices in different areas.
After identifying a market to invest in, look at that market on a micro level. Identify specific neighborhoods or ZIP codes to target while considering the following for each specific area:. While single-family rental properties are one avenue of investing, they're not the only option.
You could own a duplex, triplex, quadplex, or something even larger if you're interested in commercial rentals. Decide if you'd like to own vacation rentals or long-term rental properties, too. This includes the size of the unit or home, the number of bedrooms and bathrooms, or possible amenities such as a pool or fireplace.
Find out if there's an oversaturation or undersupply of a specific property type. You might find, for example, that an area has too many one-bedrooms and few two-bedrooms available for rent. You can do this by looking at the current inventory on the market on real estate rental industry sites such as Zillow , HotPads , or ForRent. Talking to a local real estate agent is another great way to get information on a specific market.
There are several ways to find investment properties. The most common way to identify potential investment properties is by searching the multiple listing service MLS. Websites like Realtor. You can also reach out to a real estate investment agent in the area and ask them to set up those same alerts.
A quality realtor can be an excellent source for connections to banks, lending institutions, contractors, or suppliers that will come in handy when buying a rental property. They may also be able to bring you pocket-listings, which are listings that haven't gone live on the MLS yet. Certain companies specialize in selling turnkey rental properties. These rentals require little to no work after buying -- this is a passive investment mostly for cash flow.
Of course, no rental is completely passive; you may have to get involved if things take an unexpected turn. In most circumstances, the properties have been renovated, have an existing tenant in place, and have a third-party management company handling the landlord responsibilities.
Research the market to determine if the purchase price, rental rate, and location of the property support the investment. A real estate wholesaler finds off-market investment opportunities at below-market prices. They negotiate a low purchase price with the seller and assign the contract to a third-party buyer at a higher price. The wholesaler makes a profit from the difference between the purchase price and the sales price. They often need renovations or improvements, too, so they might not qualify for financing.
There are alternative lenders, like hard money and private lenders, that can help with cash for closing and funds for repairing the property. These lenders, however, can charge high interest rates and only loan money for a short period of time. While wholesalers can have quality off-market investment opportunities, financing difficulties can make it hard to work with them.
Another way to find a potential rental property to invest in is by conducting a marketing campaign. You might use targeted online marketing or put out bandit signs. Direct mail marketing is another popular option. In a direct mail campaign, an investor sends a series of letters or postcards to off-market sellers.
Companies like List Source and Data Tree let you create and buy lists of people that meet certain criteria. You might look for owners in foreclosure or pre-foreclosure, properties that recently went through probate, or properties owned free and clear without a mortgage. You can narrow the list down by property features, such as the number of bedrooms and bathrooms, or by county, ZIP code, or city.
You can run your own mail campaign by typing or handwriting a series of letters or postcards. You can also hire a third-party company to do it for you. This method of finding potential investments involves the most effort and cost. It can be a great source for finding off-market rental properties, but it may not be the right option for you. If you're willing to put in the time, effort, and funds required to run a successful mail campaign, this is a quality source of off-market inventory.
Figuring out the net cash flow for a rental property is crucial. This is the rental income minus expenses and mortgage payments. This is especially important if your goal is to have positive cash flow which it almost certainly is. To do this, first determine what you'll be able to collect in rental income. Rentometer is a free tool that lets you analyze the average and median rental rates based on your property's location, size, and property type.
If the property already has a tenant in place, confirm that the tenant is paying market rental rates -- there may be potential to increase the rent. Always verify that the comparable rentals are in a similar condition to your property. If your rental is outdated or lacking amenities compared to other homes in the neighborhood, you may not be able to reach market rent without doing some upgrades or renovations.
After determining the market rent for the property, identify the average vacancy rate for your specific market based on the property type you're buying. Use census data or a real estate data tool to get this information.
Sparkrental has a free online rental property ROI calculator that analyzes the investment and provides the total return on investment using cash-on-cash return and cap rate. You can also calculate this on your own using the formulas below. Most rental properties use a cash-on-cash return when determining a return on investment.
However, the cap rate is beneficial when investing in a property that has more than one rental unit. You could also have unexpected problems throughout the venture. It all comes down to your personal investment goals, desired rate of return, and threshold for risk. Analyze each rental property and only move forward with the investment s that meet your requirements. If you can't buy the whole property in cash, you'll need financing.
Start the paperwork and underwriting process as soon as possible once you've identified an investment. Not every bank lends to individuals for investment properties -- identify a lender or bank that you can work with before the property is under contract.
Interest rates generally are higher on investment property loans and can vary depending on the type of property you're buying. After closing on the property, you need to choose a tenant. Screening tenants can mean the difference between a quality renter that maintains the property and pays on time or one who's late each month, stops paying altogether, or trashes the property on the way out.
Third-party management companies will handle the tenant screening process for you as a part of their services, as well. If you do this yourself, make sure your screening process is consistent for every tenant. Know what screening questions you want to ask and understand the Fair Housing rules.
If you discover a misdemeanor, criminal history, eviction, or another unfavorable result during the screening process, ask questions to find out more. If the potential tenant doesn't meet your requirements for housing which must be within the guidelines of Fair Housing , you don't have to rent to them. Remember that even the best screening process can still result in a tenant that doesn't uphold the lease.
It does not always happen in this business without holding peoples feet to the fire. What's Your Return on Life? John Larson. What Our Clients Are Saying Fractional ownership has proven to be the best way to own a luxurious vacation home, without all the work!
Tiffany C. Vacation Rental Property Thank you for showing integrity and character in our dealings and following through on what you said you would do. Issac O. Alex T. Single-family Rental Property. How did you hear about us? I'm interested in
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