Investing in Rental Properties for Beginners
Jul 9, 2021
Real estate has become a popular business venture for many due to its substantial financial benefits. But real estate itself is a broad spectrum, and the part of it that's gaining immense popularity is the rental property market.
If you're looking to invest in rental property, you first have to drop the perception that this is a way of earning a large amount of passive income. Contrary to popular belief, rental property management can be time-consuming, engaging, and demanding. While profits can definitely be obtained, it doesn’t come without some careful considerations and diligent efforts to make it happen.
If you want to invest in real estate rental property, we created a complete guide on investing in rental properties as a beginner to start you off.
How to Invest in Rental Property
Investing in a rental property comes with two main benefits. First, the rental property has the potential to appreciate over time which means its value will increase. As the equity increases, you can use this property for paying a mortgage. You can also choose to sell the property at a higher amount than the purchase price. You’ll only worry about capital gains tax when selling your rental property.
Secondly, the property has an ongoing return on investment which ensures a positive cash flow. You'll be collecting rent from your tenants every month which will be more than the maintenance cost.
Rental property can be a good investment for obtaining solid cash flow due to its appreciating market. You'll even earn more money if you choose to manage the property all by yourself rather than hiring a property management company.
Like any other business, you need to understand the basics of investing in rental properties before proceeding. You must also know that behind all the glam that comes with this kind of business, there's also the potential of losses as it carries no guarantee of return. So, how do you invest in real estate as a beginner?
Find a Good Rental Property
Your journey to investing in rental properties starts by identifying the actual property. Many people venture into residential rentals, which are also divided into either single-family homes or apartment buildings/complexes.
Once you've found your ideal rental property, it's time to do your calculations. You need to understand the estimated income that these properties can generate for you. It is important to ensure that the income you're going to get from the property exceeds all your expenses. This will typically factor in all costs, including mortgage payments, property management, repairs, taxes, and insurance.
Another way to ensure that your property is worth it is to use the 1% rule. With this, you need to estimate the monthly income on the rental property and divide it by the purchase price. If the number lies within the 1% range, go for that property because it's worth it.
To choose a good location, you must have your prospective lenders in mind and understand what they'll like. Consider things like social amenities, schools, and safety if you're looking for the best areas to invest in rental property. You should also consider buying a rental property not far from your residential area to make the management aspect more convenient.
If the property values in your area are on the upper end of the market, a rental property may not provide you with the needed cash flow. You may not have sufficient funds to buy a rental property where the market is expensive. Always look for a market where you can afford to buy your investment.
The idea of buying a rental property close to where you live is so that you can find it easy to manage by yourself. But you can always invest in other markets as long as they offer a viable opportunity. So, before you put down your money, take a look at the market and ensure you can afford it.
Invest in an area with a high demand for the rental market, stable or growing economy, and where the rental income supports the property's price. You can find free resources online or in the local directory to help you do your market research and find the information you need.
Financing Your Rental Property
Now, this is another place where there's work, and you need to trade wisely. Make sure you understand that financing an investment property is much more complicated than financing a residential property.
The main thing that differentiates the two is the down payment. If you're a home buyer with a good credit score, you'll only need a few percent on the down payment to acquire financing for your residential property. As for a rental investment, expect to pay at least 20% on the down payment even if you have a good credit score. If you can, you should consider putting down more cash on the down payment, which will guarantee a better interest rate.
Once you understand this distinction, you can now start looking for financing options available at your disposal. The process works just like a traditional mortgage. It usually involves real estate agents, credit, and an escrow company. As an investor, you can also find other down payment methods, such as a home equity line on your residential property or a real estate crowdfunding platform.
Find Your Tenants
Once you finance your property and close the purchase, it's now time to start doing business. Note that not every renter that shows interest in your property should live there. Screen your renters beforehand to find quality tenants that can properly maintain the property and pay on time. Disqualify those that might not be able to afford rent, have a habit of paying rent, or that don’t have a good track record of maintaining their space.
Several online services can help you find quality tenants, such as Turbo Tenant, My Rental, and My Smart Move. They can help you screen tenants at a fee and still ensure you comply with the Fair Housing rules. You can also hire third-party property management companies to help you screen tenants.
Manage Your Property
If you're going to manage your property all by yourself, you must know how to screen tenants, handle leases, handle maintenance, collect rent, and handle security deposit deductions. You can use free online rental services to help you collect rent, manage leases, send out text messages, and deposit payments to your bank. Make sure you stay proactive with maintenance so you don't end up with emergency repairs.
If all this management work seems too cumbersome for you, you can work with a third-party property management company. The company will handle everything, including maintenance and collecting rent. These companies have different payment structures and varying fees. The fees can be a flat rate or a percentage of the rent ranging from 8% to 12%.
Owning rental properties is a worthwhile investment that has a good chance of bringing in huge returns. But, it also comes with its risks that you must find ways to mitigate. Luckily, if you follow this beginners guideline carefully and find a suitable property with good tenants, it won't take time before you start cashing in a stream of income.
The essential part of all this is to find the best place to invest in a rental property, which involves finding a property within an area that has a stable or growing economy. Our agents at SimpleShowing have extensive knowledge of the local real estate market. With our help, you are sure to find the perfect rental property to buy. Contact us and let's work together on your rental property journey.