Unless you’re a real estate investor who’s been living under a rock, chances are you’ve asked yourself, “how can I start investing in rental properties?”. The short answer — hard work and listening to these investing in rental property tips. The longer answer — start by doing your research so that you find the right neighborhood and a property that fits into your budget. Next, calculate all expenses and profits involved with the purchase. And finally, find a property that crosses every item off your list of priorities.
3 Investing In Rental Property Tips You Can Take To The Bank
Don’t let a lack of experience keep you from investing in rental properties. If you are willing to work hard, educate yourself, and heed these investing in rental property tips, you’ll be well on your way to achieving a comfortable retirement:
Pro Tip #1: Do your own research. You’ve made the decision to leave your nine to five job in order to pursue your dream career of real estate entrepreneur. You’re excited. You’re hopeful. You’re ready to start collecting those passive income checks. While these feelings are common (and in fact, encouraged) they shouldn’t get in the way of your due diligence phase.
Seeking out advice from other investors, real estate agents, private lenders, and brokers is a great way to learn; however, conducting your own research is crucial if you want to achieve success. Read books, attend seminars, frequent networking events, listen to podcasts, or do whatever it takes to make yourself confident enough to land a deal and make an offer.
It’s important to remember that investing in rental properties is a long term strategy, meaning the decisions you make to day will affect your future financial freedom. In order to avoid mishaps, it is recommended to purchase your first rental investment property in the market in which you live. This way, you’ll already have a feel for the local environment and an understanding of its economic state. You can pull “comps” from the MLS (or sites like Redfin and Zillow if you are without a real estate license) to see what other properties in the area are being rented for and price your property accordingly. Lastly, when you buy close to home, you can acquaint yourself with local laws and regulations. In many cities, rental properties are treated more like businesses than residences thus spurring surprising fees if you haven’t done your research ahead of time. The last thing any investor wants are items like like required bedroom size to rent or renovation permits getting in his way.
Extra Advice: The more you mind your due diligence, the bigger your competitive advantage.
Pro Tip #2: Calculate costs. While investing in a rental property can be an extremely lucrative investment, there are numerous costs that keep real estate entrepreneurs from even getting started. Let’s begin by talking about that infamous down payment. Investment properties generally require a larger down payment than owner-occupied properties and therefore have more stringent approval requirements. Unless you’re working with a private lender who you’ve already negotiated with, a 20 percent down payment will most likely be required. And a down payment is just the beginning.
After collecting enough money for a down payment, you’ll then have to calculate renovation expenses. If you purchased a rental property for a good price (aka below market value) chances are, that property is a “fixer upper.” While buying a cheaper property will save you money up front, it may not be worth the cost to perform improvements. This is where research and due diligence comes to play again. Maybe you’ve found a fixer upper property that you love. That’s fine. Just be sure to perform a full inspection and calculate your ARV (after repair value) before you buy. You might find foundation damages or HVAC problems that, once repaired, will put you over budget.
And of course, you can’t forget about those pesky operating expenses. On average, operating expenses account for between 35 and 80 percent of your gross operating income. Here’s an easy way to look at it: If you charge $2,000 for rent, expect your operation costs to be somewhere in the ballpark of $1,000. In addition, you can estimate maintenance costs to be about one percent of the property value annually. Other costs include insurance, possible HOA fees, property taxes and monthly expenses such as pest control and landscaping. \
Finally, the fun part…Calculating your returns. (You must have known I’d eventually get to the profits part, that’s the reason we’re all here after all). The Wall Street Journal recently announced that individuals investing in distressed properties should aim for a 10 percent return (which should allot for enough to pay for upgrades along with a profit.) Take the time to sit down and figure out for every one dollar you spend, what is your return on that dollar? Stocks offer different returns than bonds, which offers different returns than investing in real estate does. Once you’ve done the math, know that a six percent return in your first year as a landlord is considered healthy, especially given that number should rise over time.
Extra Advice: Give yourself some wiggle room. For every total you calculate, add two to five percent to that number.
Pro Tip #3: Find the right place. Investing in rental properties can sound enticing, especially when followed by the words “passive income,” but don’t let the word “passive” fool you. When first embarking on your rental property investing journey, you certainly won’t be sitting around on your couch collecting checks. This lifestyle might be your end goal (which is totally achievable) but it will take hard work and dedication at the beginning of the process in order to get the ball rolling. When searching for your first property, ask yourself the following:
Do I have the time it will take to maintain this property?
What are my long term goals for this property?
Do I have the budget to hire a property management company so that I don’t have to handle day to day maintenance tasks and finding tenants?
Do I have enough capital saved up in my rainy day fund ready to use for costly potential hiccups?
Another thought to have before buying a rental property is, “where is the perfect neighborhood to buy?” Often times, people living in neighborhoods where homes are mostly owned will dislike their renting neighbors. Therefore, buying in an area with few renters to start may not be the smartest move. On the other hand it will be harder to keep long term tenants if you’re buying in a cheaper area with, say, higher crime rates. The key is to find the right balance. The last thing you want as a rental property owner is to have your house be the worst looking on the block. Not only will it affect rentability but it also could lead to complaints and possible citations in the future. The lesson here? Don’t buy a home that needs a lot of work just because you love the neighborhood; you may end up going over budget in the long run.
Extra Advice: Each property you own serves as a reference to your work, abilities, and commitment…Be sure to keep this in mind before buying.
If you’re ready to start earning passive income, these investing in rental property tips are a great place to start. And for your last piece of extra advice…as a beginner, don’t expect to be the best, just expect to learn a lot.