Rental property investing can be a great way to build wealth over time. You can benefit from tax advantages while earning passive income from monthly rent.
But rental property investing isn't always easy. Talk to a few landlords and you'll quickly find out that owning a rental can be enjoyable or a complete nightmare.
Below are six tips for beginner real estate investors interested in purchasing rental properties.
1. Choose your investment strategy wisely
Rental income can be achieved through different types of rental property investing.
There's residential rental property, like a single-family rental, which is one of the most popular rental options for new investors. Residential property includes condos, townhomes, duplexes, triplexes, and fourplexes.
There are also commercial rental properties like self-storage facilities, retail space, and office buildings.
Across the property types, income is earned in the same way: Renting the unit to a tenant. However, the management process for each varies greatly. Managing a 20-unit apartment complex is very different from managing a single condo rental property.
Before you start rental property investing, learn about the various rental types and determine which method of real estate investing appeals to you most. Keep in mind that commercial real estate often costs more than a residential rental. Consider how much you have to invest when you explore the different methods of investing.
2. Know your numbers
Rental properties have several expenses relating to the investment property, including:
- property managers,
- property taxes,
- property insurance,
- utility bills,
- property maintenance,
- rental vacancies,
- advertising, and
- other miscellaneous fees.
Carefully analyze real estate investments and determine the actual expenses relating to the property. There are free online rental property calculators you can use to help you. Don't rely on estimates for expenses. Get actual quotes for insurance, confirm the tax bill based on your sale price, and request copies of recent utility bills to confirm costs.
It's also important to not overestimate your potential rental income. Look at the current going rents and confirm that you can achieve that rate based on your rental property. If you're not sure, ask a local property management company or Realtor for their rental price opinion.
Then run your numbers. And run them again.
3. Invest for cash flow
Cash flow is the primary purpose of investing in rental real estate. While you can buy investment properties for the tax advantages, potential to add value, or future appreciation, cash flow should be a top priority.
Some investors only buy a rental property if it produces a specific return on investment (ROI). Others set a minimum net rental income per unit. Determine your criteria for cash flow based on your financial goals and risk tolerance. Pursue investment opportunities that align with your cash flow criteria.
Buying a profitable rental property, especially if you have a mortgage payment, isn't easy. But you can do it if you're diligent with your buying criteria and know your numbers.
4. Choose the right market
No two real estate markets are the same. Certain areas of the country see real estate appreciate at rapid rates while others aren't growing at all.
Identify markets on a large scale, such a specific city showing high demand and growth, and on a small scale, including zip codes or neighborhoods that hold opportunity for your rental property type.
Don't buy an investment property just because it's cheap. Areas with low-value real estate are typically priced according to their worth. It may be an area high in crime or one where demand is low. If you find an area where real estate is cheap, do your due diligence and identify the factors contributing to the lower purchase prices. Keep in mind that there are areas of the country, like the Midwest, where real estate in general is considerably cheaper than other areas like the Northwest or Northeast.
Ideally, you want to buy rental property in a desirable location with favorable supply and demand.
5. Keep reserves
Rental properties need repairs and improvements over time. It's only natural that things break or need to be upgraded.
Set money aside for these improvements in a maintenance reserve each month. It's good to put at least 10% of your monthly rental income into repair reserves. You may want to set aside more, depending on the age and condition of the property.
6. Manage the property properly
It takes a lot of work to manage a rental property. You have to fill vacancies, screen tenants, execute leases, show the property, collect rent, and communicate with tenants and vendors. It can be a full-time job -- especially if you own multiple rental properties.
You can manage the investment property yourself or hire a management company to do it for you. No matter what route you take, make sure the property is managed properly. Have a thorough lease, easy payment options, and make sure the tenant is maintaining the property according to the lease.
These six tips will help you regardless of the type of rental real estate you purchase, but there are other important considerations to take into account. Do your due diligence on the various investment strategies before buying.
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