Do you wish to learn how to start investing in rental properties but do not know where to begin?
If you are a homeowner, then you know how complex it’s to purchase your first house. It gets even more complicated and expensive once you’re buying a rental property.
But real estate investing is an excellent way to diversify your portfolio and increase your cash flow.
Some of the very wealthy individuals have employed rental properties to retire early and drastically increase their net value.
Tips For Investing In Rental Properties
Concentrate on Single-Family Homes
Investing in rental properties can mean various things to different people. For simplicity, this post will focus on single-family houses, condos, or apartments. Other forms of property such as industrial buildings, shopping centers, or entire apartment blocks are very different.
In comparison with industrial properties, which get a lot of usage and activity, single-family homes typically experience less wear and tear since there is only one person or family residing in the machine.
Most new real estate investors begin with rental properties by buying a second home and securing renters. The target is to have the tenant pay more than mortgage every month. But first, you need to ask yourself some questions.
9 Questions to Ask Yourself Before Getting Started Investing in Rental Properties
1. Do You Have the Time?
I want to be quite clear: Investing in rental properties will need your time. Unlike stocks and bonds, there is a great deal of time required at the beginning of the investment.
You need to discover the property, do the financial stuff, find tenants, and more. It’s a great deal more time-intensive than investing in a cheap index fund.
You will want to spend time locating a fantastic property management company, also. If the rental property is local, you have two options: Do the maintenance work yourself or hire somebody.
If you decide to not employ a property management firm, consider whether you have the time for repairs. If your tenant contacts you when a pipe breaks or the air conditioner shuts down, are you can show up and repair it? This is only one of the most essential things to think about when you start investing in rental properties.
Sure, you can hire someone but this will lower your profits. If this is your first rental property, it is also going to take time to understand what is required of being a landlord.
Make sure to ask yourself beforehand whether you have the time. If not, are you okay with using a control company to save you the headaches associated with renters?
2. Do You Have the Money?
Purchasing a rental property has some similarities to and some differences from purchasing a house that you live in. But using a rental property, you must put at least 20% as a down payment. This is a huge amount for most investors!
The other choice is to avoid financing and purchase the lease with all cash. While much less likely of a choice, it is still possible for many investors.
That said, purchasing one home in all cash might not be the best idea. Frequently, you can purchase more properties if you use financing and spread your cash across several investments.
Additionally, funding makes it a lot easier to procure bigger and more expensive properties than an all-cash deal. As always, leveraging an advantage has advantages and disadvantages. As you’re able to buy more, you’ll also have more risk.
Purchasing more than one rental also requires more out of an investor. More expenses, more renters, more repairs but more passive income.
3. What Type of Property Are You Going to Buy?
Now you need to decide what type of property to buy. The two main kinds are called a fixer-upper or a rent-ready property.
Do you wish to purchase an older house that requires more repairs? Or, one who is turnkey ready and doesn’t need any of your handyman skills?
If you’re a handy person who likes a project, then a fixer-upper is a fantastic alternative. Not only are fixer-uppers cheaper but you might also spend some time doing repairs on your own, saving money in the procedure. Personally, this seems just like my nightmare (as I’m very unhandy) but others adore a fantastic hands-on job.
With fixer-uppers, it’s very important to do comprehensive research and have a thorough home inspection to make sure nothing is missed. Trust me, I know. I’ve”gotten” to replace both in my house. Ensure your budget for the essential home repairs, remodels or maintenance needed out of a fixer-upper.
Rent-ready properties will normally have minimal if any restoration or work required. All these are more expensive but do not require you to take care of remodels or big repairs. Both of those take some time and can delay obtaining a tenant at the property.
Unless you have experience renovating homes, locate a property that is rent-read and can start making you money instantly. Never forget the goal of investing in rental properties would be to create income.
Finally, you want to run the numbers on both types of homes. See what is needed now and try to forecast when large things like air conditioners or remodels might be required.
As a homeowner, I will say that things rarely break alone. All terrible things happen in threes, right?
4. Will You Only Purchase Locally or Long Distance?
As a homeowner, the thought of purchasing outside my town or state is scary. However, you should not let geography cloud your ability to invest in rental properties. If you reside in a high rental area such as San Francisco or New York, it’s much harder to buy a local rental than somewhere like Arizona.
- Being a Local Investor
If you live near your investment property, it’s simple to go over and deal with matters when there are any emergencies. Additionally, it is easier to manage with no property management firm. This means more money for you.
- Extended Distance Investor
Buying a rental property someplace else in the country might look riskier but also, it lets you get the most bang for your dollar. They can deal with rent, home repair, and other renter issues.
If you choose to buy outside of your community area make certain to have a great realtor and property management firm.
- Purchase REITs
Would you like property diversification without buying a home? They are very much like cheap index funds, such as the ones utilized by Betterment and Wealthfront.
When you purchase a REIT, you’re investing in businesses that own the real estate, not the true real estate itself. You can pick specific REITs that invest in certain regions of the country or select something very wide like Vanguard’s fund VNQ.
5. Are You Looking for Immediate Cash Flow or an Appreciation Property?
This is a very important question to ask when you first get started investing in rental properties. There are two Chief ways you can make money from rental properties:
- Cash Flow
The first is getting instant cash flow from a rent-ready place. This means you make more money each month than the house is costing you.
Good areas for this type of investment are usually smaller investments in midwestern and southern states that have low taxes and good job development. Ordinarily, when you sell the house you do not get much compared to an appreciation property, however, you should have the ability to find a steady rental market.
- Appreciation Property
The second solution is that the appreciation property, which tends to earn a lot more money. As you may not earn as much each month from cash flow, you can make a lot more as the house ages and enjoys.
Some markets such as New York and California generally have a high appreciation speed. When you sell these homes you can make big money as the requirement is very large.
It’s important to learn your rental property goal before you start investing. Make sure to understand your budget, as well as both short-term and long-term goals to make the best decision for your future.
6. Will You Hire a Property Management Service?
I enjoy being a homeowner but hate it when things break down. As I mentioned, I’m not handy, so I almost always need to employ someone to repair the issue. When you start investing in rental properties, will you hire a property management agency or do everything by yourself?
If you don’t want to take care of day-to-day issues, I suggest hiring a property manager. This is especially true for rental properties which are far away from wherever you live. Otherwise, you may want to fly out and see your properties when things happen or a new tenant takes over. Although it is possible to handle remotely without a property management firm, it might demand a good deal of work on your end.
This goes back to the first question, how much time do you have to manage your investment? Would you want to do everything yourself or do the bare minimum and let someone else deal with the issues?
The fees vary greatly for different rental property management groups and I encourage you to perform extensive research. Shop around and examine three or four of these before deciding on a single for the rental property.
7. What Kind of Demographic Are You Trying to Bring?
When you start taking a look at rental properties you want to get a different goal. Identify your perfect demographic for the area in which you purchase the property.
Would you wish to discover a property that brings families and kids?
Are you searching for younger individuals who do not care about the surrounding school districts?
Are you prepared to purchase in a lower rental neighborhood?
You want to be sure that your demographics fit your property. The lease amount, property, and location need to align with your ideal tenant.
For instance, don’t get a house that’s otherwise excellent for a family but is situated right next to a college or sorority house. Align your property and demographic to possess the best tenants and earn the most money.
8. How is the Location?
Since the old real-estate adage goes, the main element in buying a home is location, location, location. It is especially true when it comes to investing in rental properties.
Your property’s place has a huge impact on the tenants you attract. Here’s what you should evaluate your place on:
The school district that your property is situated in will have a large effect on the type of tenant you attract. As an example, if you want to pull families, start looking for places with good basic schools.
Elementary schools are five or six decades of a child’s lifetime and most families need their children’s beginning years for a fantastic experience.
The neighborhood is also quite important once you’re researching rental properties.
One other significant part of your area and leasing property to take into account is the yard and surrounding regions. Families with dogs and kids will want to have a yard or a park close by. This is a potential deal-breaker for a lot of tenants.
9. What’s Your Exit Program?
As with any big investment, an exit program is a significant part of investing in rental properties. Do you intend to keep the house for 10 or 20 years? Do you want to buy and sell quickly?
When you put money into a 401k or IRA you do not plan on touching it before retirement age. You ought to think about rental properties in the same manner. Do not purchase and believe you’ll instantly have a whole lot of cash flow. Make sure you have a plan for this big of an investment and don’t just wing it.
All these will be the 10 most important questions to ask before you start investing in rental properties. If you are ready to answer these, then check out the rental property suggestions below to help you score your initial.