Renting is an attractive investment strategy for investors who don’t want to make property ownership a priority in their lives. The stock market is a volatile place where business cycles and economic trends can take years to play out. For this reason, it’s not uncommon for investors to do well during the years they own a property but see their portfolio’s value go down during the years where they rent.
For most, investing in rental properties is a great way to make money. However it is a risky investment and if done incorrectly can end with a large loss. In this article I will talk about the different types of rental property and how to become an effective investor.
As I’ve mentioned before, I’ve been in the market for a rental property for the past two years. I’ve purchased two properties — one in L.A. and one in Seattle — and I’ve been renting them out over the past year. While I’m still in the early stages of learning how to invest in rental property, I’ve gained some insight and I wanted to share it with the rest of you. In this post, I’ll share some of the pros and cons of buying rental property with you and talk about what it’s like to own a rental property.. Read more about investing in rental property for beginners and let us know what you think.
5. It’s a physical asset – Unlike other investments, real estate is a tangible asset that you can touch and see.
The last big advantage of real estate investment is that the asset you’re purchasing is tangible, whether it’s a single-family house or an apartment complex.
This means you can touch it, walk inside of it, and see it right in front of your eyes.
While you technically own anything when you buy a stock or bond, it’s just on paper. Because the asset isn’t physical, you don’t have much influence over your investment.
You may really own your real estate assets if you invest in real estate. As a result, you may make adjustments as you see fit while also seeing the additions or improvements take shape right in front of your eyes.
This advantage is what attracts investors to real estate investing: not only can you get passive income, but you can also see exactly where your money is going each month.
How To Get Your Finances Ready For A Real Estate Investing
Make sure your personal finances are in order before plunging into a rental property venture.
Before you invest your first dollar, here’s a step-by-step explanation of everything you’ll need to do first.
1. Create an emergency fund – This will safeguard your money in the event of a financial emergency.
40% of Americans would find it difficult to come up with $400 in unforeseen expenditures.
A issue like repairing a broken window at one of your homes may put you in more debt than you can manage if you don’t have a short-term emergency fund.
This may also shield you against unexpected expenditures in your personal life, like as a flat tire or a medical bill, so you don’t have to depend on credit cards, take out a loan, or dip into your retirement fund, all of which can put you in financial difficulty and leave you with a mountain of debt.
Begin with $2,000 and gradually increase to a fund that can cover all of your monthly expenditures. These fees include your investment expenditures as well as any personal payments you must make.
Expenses associated with your investment may include:
- Taxes on real estate
- Vacancies in one or more of your properties over an extended period of time
- Costs of renovations or minor repairs, such as a leaking pipe or a cracked window
When you own real estate, you’re responsible for all of these costs, so be sure you have a strategy in place to pay them ahead of time; otherwise, you may jeopardize your investment or personal finances.
2. Make a budget – Make sure that every cent you make has a purpose so that you may devote as much money as possible to your investment.
When you get your rent payment, divide it into three categories: expenses/spending, repairs/maintenance, and investment.
When we discuss expenditures, we’re referring to your mortgage payment, property tax, insurance, and other fixed payments that you must make in order to maintain your home.
In terms of maintenance, you should put aside some funds in case one of your homes develops a problem. If you don’t have anything urgent to repair right now, you may put this money into your emergency fund.
The percentage of your rent that you invest will be used to purchase your next rental property. When you put aside a portion of your rent for your investment, you’re effectively utilizing your tenant’s money to purchase the next deal without having to spend your own cash.
Alternatively, you may put that money into your own account and invest in even more offers all at once.
This may be accomplished using the 75-15-21 technique, which states:
- You’ll spend 75% of every dollar you make on expenditures and spending.
- Every dollar you make will go towards saving or repairs at a rate of 15%.
- Every dollar you make will be invested at a rate of 10%.
When you budget your money, you’ll be able to see precisely where your money goes each month. It will also assist you in determining where you are overpaying and where you need to improve.
Furthermore, a budget aids in the organization of your finances, allowing you to know precisely how to spend your money as soon as you get it.
What Is The Best Way To Begin?
It’s not only about the home when it comes to rental property investment; it’s also about the location, the kind of dwelling you want to purchase, the potential profit you may make, and the loan you can obtain from a bank.
Where do you intend to purchase your first home?
This inquiry may seem simple, but many novice investors overlook information about the location that will have a significant impact on their prospective profits.
1. Location – A property’s location will influence its expenses, rent, and potential earnings.
The location in which you buy a home has a significant impact on the amount of rent you may charge.
For example, if freshly refurbished rental houses only charge $1,000 per month in rent, you may have a hard time finding a renter if you charge $1,500 per month.
On the other hand, if the typical monthly rent in a certain region is $1,000, yet you only charge $500, tenants may flock to your property!
Check your local listings to discover what other property owners are asking for rent when you’re looking for your first investment.
Then think about the property itself and if renting it would be a good idea. It may not be a smart investment for you if you have to spend $3,000 per month on maintenance and a mortgage payment, but you can only rent the home for $1,000 per month.
strong>2. Tenants – Once you’ve decided the location you want to buy in, you’ll need to find tenants to actually live there on a monthly basis.
As a landlord or rental property owner, you want renters with a solid payment history and the financial means to pay for their rent.
A excellent payment history indicates that the tenants have never been evicted from a home owing to late or non-payment of their prior landlord.
You don’t want tenants inhabiting your property without paying anything because even if you don’t have any renters, you’re still responsible for paying your mortgage and property tax; if you don’t make any of those two payments, you may lose your home.
You’ll also want tenants who can pay their rent on time and in a regular manner.
If your renter does not have a steady source of income, you may have difficulty collecting rent since your tenant simply does not earn enough to cover the monthly payment.
To prevent the scenarios described above, thoroughly screen each application by doing a background check, obtaining a credit report, and contacting prior landlords for references.
This will reduce the likelihood of having unqualified renters who may give you problems in the future.
You may utilize online platforms like RentSpree to make the tenant screening process easier for you.
3. Job market/future development – this will increase demand for your home, resulting in higher rent.
People choose to relocate to areas with strong job markets and long-term growth since it implies more employment possibilities and a better standard of living.
More possibilities lead to increased demand for local real estate, which means higher rent for investors and landlords.
States, for example, like to have large firms like Tesla establish warehouses there since it not only creates employment possibilities for residents, but it also encourages small businesses to follow suit and establish themselves there.
This will increase demand for both residential and commercial real estate in the area, allowing rental property investors like you to earn even more.
4. Crime rate – this will have an impact on both demand and the kind of renters you may expect.
Nobody wants to live next door to a crime hotspot.
When you buy property in a high-crime location, you’ll probably get fewer offers, which means vacancies and lesser profits.
If your property’s crime rate is high, it’s possible that it’ll be vulnerable to a break-in or other crime, so you’ll need to include it into your budget.
As a general guideline, stay away from areas you wouldn’t want to live in, don’t know much about, or have never lived before.
5. Property tax – the amount of profit you get at the end of the month will be affected by this.
When you own a piece of rental property, you must pay property tax to the government. It is determined by the location of your property and the value of your property.
The neighborhood, surrounding market, local cuisine and entertainment, and recently completed improvements may all have an impact on the amount of property taxes you pay each year.
Fortunately, as a landlord, you may include the additional property tax in your monthly rent.
Assume you have to pay an additional $100 each month in property taxes. You can transfer that $100 onto your tenants by charging them an additional $100 per month in rent.
That implies that if your renter was paying $550 per month to live in your home, you might increase the rent to $650 per month to compensate the additional tax you must pay.
This manner, you may keep your part of the earnings without having to deduct a portion to cover property taxes.
You may look up your property tax on the website of your local county’s treasury.
Are you looking for a certain kind of rental property?
You may buy a variety of various types of property and rent it out to tenants to earn passive income.
Each has its own set of difficulties and advantages, but each may be an excellent option for a novice to begin investing in real estate.
Single-Family Residences (SFH)
Because there is a plentiful supply on the market, most people are more acquainted with them, and demand is usually always strong, single-family homes (SFH) may be a good place for novice investors to start investing in rental property.
A reduced turnover rate is one of the advantages of investing in single-family houses.
A turnover rate is a proportion of renters who leave your property in a certain length of time; if your turnover rate is high, tenants are continuously leaving your property in a short amount of time. You have renters that stay in your property for a long period if you have a low turnover rate.
To put it another way, the greater your turnover rate, the more money and time you’ll have to spend on finding a new tenant to occupy your property; conversely, the lower your turnover rate, the less money and time you’ll have to spend on finding a new tenant.
Because most individuals prefer to have a home with a private yard where they can enjoy and relax with their family and friends, SFHs have lower turnover rates.
So, for a novice investor like you, SFH is a fantastic place to start since there are plenty of homes to select from on the market, and SFH has a lower turnover rate, allowing you to put the money you save into the next transaction.
Keep in mind, however, that any problems that occur on the property are your responsibility to resolve. You’ll have to replace these items if the air conditioner fails or the house requires a new roof.
Furthermore, single-family houses are usually located on bigger lots that may need upkeep. While the renters are generally responsible for the home’s day-to-day requirements, if they aren’t met, you, the property owner, will be held responsible.
Condos, like apartments, are separate dwelling units inside a larger residential complex.
Condos may be a better and simpler place for novice investors to start their investing adventure since condo owners only have to worry about what’s inside their unit, and the rest is taken care of by the community.
Yes, your responsibilities as an owner are reduced, as are all the facilities such as a community pool and a gym facility, which may assist to attract both investors and renters.
When buying a condo, bear in mind that you or your renters may be required to pay a Homeowners Association charge, often known as a HOA.
A Homeowner Association (HOA) is a group that establishes and enforces regulations for all of the homes and inhabitants in a neighborhood.
Many investors are turned off by two drawbacks:
Monthly HOA charge – a monthly cost that isn’t set in stone and may fluctuate over time.
When you buy a home in a neighborhood with a homeowners’ association, you have to factor in an additional expense that will cut into your profit margin.
While some HOA communities provide a wide range of facilities, services, and other advantages, you will have to pay a premium to take use of them.
You may, fortunately, include HOA costs in your rent.
Let’s suppose your HOA fee is $200 per month, and you wish to rent the home for $550 per month. Instead of $550, you may add $200 to the total and rent your home for $750.
This way, you won’t have to worry about the HOA charge eating into your profit; you’ll still earn money regardless of the amount of HOA.
Impose rules and regulations – you must adhere to the HOA’s rules and regulations.
An HOA establishes guidelines for the look of both your home and the neighborhood.
If you want to paint your door a different color, for example, you’ll need to check the HOA rules and limitations first to make sure you’re adhering to community standards.
Some HOA communities have tighter restrictions about how many vehicles you can park in the neighborhood or how late you can have your back-yard BBQ.
But, before you write condominiums and HOA off your to-do list, consider the following advantages of having a HOA:
- Organize public spaces, such as pools and playgrounds.
- Maintain the unit’s exterior, such as fixing the roof and fence.
- They will call your neighbor and resolve any difficulties that arise between you and them.
Although a HOA establishes rules and regulations that you must obey, they also assist in the upkeep of the neighborhood and its appearance. You may pass the fees on to your renter so that you don’t have to take a bite out of your earnings.
A multi-family residential building is a single structure that may house several families living independently.
That is to say, the property is made up of two to four family units; think of it as several single-family houses joined together and sharing the walls between them.
They are a great method for first-time investors to get into rental property since they allow new investors to reside in one apartment while renting out the others.
This is referred to as “House hacking.”
When you own a multi-family residence, you may not have as low a turnover rate as a single-family home, but the power of house hacking may save you a lot of money by lowering your own housing costs when you live in one of the units.
This means you’ll not only have a place to live, but you’ll also be able to rent out the other apartments and earn money to pay your own costs.
As an example, let’s say your first property is a three-family unit, or a triplex. Then you make the decision to reside in one of the apartments while renting out the other two. The combined rent from the two apartments is $1,800 per month.
After deducting all of the expenditures associated with purchasing and maintaining a triplex, you’re left with $300 a month.
You’ll not only be able to live rent-free, but you’ll also be able to earn an additional $300.
You may now save this money, along with the monthly rent you would have had to pay for your own home, and put it towards the next bargain.
Just remember that you’ll be living within arms reach of your renters, so if anything goes wrong in the middle of the night or they have a complaint about a neighbor, they may show up at your door.
This implies that your privacy in a multi-family house is restricted, so make sure you consider your living standards before purchasing one.
assemble your team
Because you’ll need to depend on someone else’s skills to solve an issue, whether it’s locating a bargain or getting a loan to make a purchase, rental property investment is a team effort.
In the beginning of the real estate process, you may wear a variety of hats. However, as you acquire more expertise and equity, you’ll most likely expand your crew.
As a real estate investor, you should consider adding the following two individuals to your team:
Agent for Real Estate
A real estate agent is someone who can provide you with information about the real estate market and assist you in making a transaction.
You may be unfamiliar with the current pricing, trends, and circumstances of the local real estate market when you first start investing in rental properties, which may lead to you making a poor purchase that leaves you with more debt than you can manage.
Based on current pricing and trends from all available homes on the market in a region, a real estate agent can assist you in finding a property that best fits your tastes.
For example, if you want a three-bedroom, two-bathroom house, you may tell your realtor, and they would only search for homes that meet your requirements while looking for a home.
Other advantages of working with a real estate agent include:
1. If you’re a buyer, they’re free since the seller will cover your agent’s commission when you buy a home.
When you buy a rental property via an agency, you may take use of the expert services without paying any money.
To put it another way, after the transaction is completed, the seller is responsible for paying the agent you hired.
2. Can represent you and assist you in negotiating the transaction – you won’t have to deal directly with the seller.
When the real estate agent represents you and negotiates with the seller, they have your best interest in mind. That means, they will try to get you the best prices and more favorable contract terms for the house.
Let’s suppose you’re looking to buy a home for $235,000 and want the seller to replace the roof with a new one. Your realtor will call the seller and attempt to lower the price to your satisfaction, as well as see what the seller can do about the old roof.
However, there are several drawbacks to hiring an agent:
- Being simply one of many customers – if the agent has a lot of clients, you may not receive the attention and advice you need.
- Additional fee – since an agent is sharing his network with you, there may be a fee.
When you deal with a real estate agent that has a relationship with a bank or an insurance company, you may be able to get better pricing and conditions.
When agents provide their network and other resources, however, there may be additional fees in addition to the commission rate.
When you go to a banker before you start searching for a house, they may assess your present financial position and tell you what type of loan you qualify for depending on your income and credit.
Let’s say you’re presently earning $50,000 per year and want to purchase a house to rent out. Your banker can tell you what type of loan is available and how large of a loan you can get depending on your present income and credit, which may help you determine where you can make a buy.
They may also advise you on how to obtain the greatest interest rate, whether it’s improving your credit score by paying your bills on time or having a side job to supplement your present income.
Companies and banks evaluate your credit score to determine how successful you are at repaying loans; the better you are at repaying your debts, such as credit cards or school loans, the higher your score may be. However, if you aren’t excellent at repaying them, you will have a worse credit score.
The interest rate you get on your loan may be influenced by your credit score.
The lower the interest rate, the less you’ll pay in interest and the more money you’ll have to put into your next transaction.
And a one-percentage-point difference in interest rates may cost or save you hundreds of dollars each year.
A 3% interest rate on a $240,000 mortgage, for example, implies a monthly payment of $1,011.85. However, if you pay 4% interest on the same mortgage, you’ll have to spend $1,145.80, which means you’ll be paying more than $1,600 per year!
Every cent you save is money you can put towards your next investment.
Having a real estate agent and a lender on your team can make your investing adventure go as smoothly as possible since they can advise you early on in the process of purchasing an investment and assist you in determining which properties are suitable for you.
Calculate your rent and potential profits
If a property is worth pursuing, it will be determined by the rent you pay and the possible profits you get.
The objective of rental property investment is to get passive income from rentals so that you can save or invest in additional transactions to make even more money.
However, determining the rent before you actually rent the house out may be tricky.
Fortunately, by asking your real estate agent (assuming you employ one) about the typical rent in the region, you may make an informed estimate about the possible rent. You may also look up typical rents on websites like Zillow.com, Realtor.com, and Craigslist.
When searching at internet websites, locate all the rents in the region you’re interested in, average them all out, and use that amount as the beginning rent you’ll get when you’re ready to rent out your home.
If there are five homes on the market, for example. Each is $1,200, $1,350, $1,175, $1,220, and $1,320 a month.
To get the average rent, put all the rents together and divide by the five homes to get $1,253. This will give you a general idea of how much rent you might charge if you buy the home.
If you want to increase your rental income, renovate your home and add amenities such as a pool, hot tub, or game room.
Keep in mind the properties you’re considering when calculating the amount of rent you’ll get. If all of the other homes are new and renovated, but yours isn’t, you may need to lower the rent to make the property more financially appealing to a renter.
When calculating the possible return on your investment (ROI), rent is just half of the equation; you must also factor in the costs and expenditures associated with buying and maintaining a property.
The return on investment, or ROI, is the amount of money you’ll get back after investing your money.
Let’s pretend you paid $10,000 for a home. After subtracting mortgage payments and monthly maintenance/repairs, this property generates a total profit of $700 per year.
That implies you’ll get a 7% return on your investment.
The greater the return on investment, the more money you receive back. You may then reinvest this money in the following transaction to earn even more money, or just keep it as profit.
There are seven kinds of costs to consider when calculating your ROI.
1. A downpayment of up to 20% of the buying price is typically required.
The downpayment is 20% of the purchase price that you must pay to the bank up front, with the rest covered by the mortgage loan that the bank provides.
For example, if you want to buy a $250,000 home, you may need to put down 20% of the buying price, or $50,000 in this instance.
The downpayment is seen by the banks as your commitment to the investment, and the larger the downpayment, the lower the interest rate and monthly payment will be. This is because banks consider a larger downpayment to be a lesser risk since you have a larger interest in the home.
Furthermore, the more money you put down at the start, the more equity you’ll have in the house, resulting in reduced principal payments and a lower interest rate.
You may save hundreds, if not thousands, of dollars each year if you have a low interest rate.
Remember our previous example: a 3% interest rate on a $240,000 loan results in a monthly payment of $1,011.85, while a 4% interest rate results in a monthly payment of $1,145.80.
Every year, you’ll have an additional $1,600 to save and spend in the next bargain.
So think about your financial position and see if you can spend a bit extra up front to get a lower mortgage interest rate.
2. Monthly mortgage payment – a payment that covers the principle and interest on a loan on a monthly basis.
3. Vacancy – how long will your property be vacant before you locate a tenant?
The location of your property has a significant impact on its vacancy rate; the higher the demand in a certain region, the lower the vacancy rate.
A property in New York City, for example, may have a lower vacancy rate than one in the Midwest. You will have no trouble getting renters if the area is desirable and people want to live there.
However, if your rental property is not in a desirable area, it may remain empty for months at a time, eroding whatever earnings you gain in the long run.
You’re still responsible for paying your mortgage and property taxes on schedule even if your house is empty; otherwise, you risk losing your home.
So, if you have a tenant in your home, put away a part of the money in the case that your home becomes empty.
4. Repair and upkeep – When things fail, you’ll need money to fix them.
Accidents happen, and things break, so make sure you put money away every month in case anything goes wrong.
People like to live in a beautiful, comfortable environment, so if you keep your home in excellent condition, you’ll be more likely to attract better quality tenants with more rent.
Furthermore, since your renters know you’re a trustworthy and responsible landlord, you’ll have a greater chance of retaining them for longer.
5. Property tax — a yearly or biannual fee that you must pay to the government. This money is used to fund local community projects such as schools and renovations.
6. Insurance – If your down payment is less than 20%, your lender will need you to purchase private mortgage insurance.
PMI, or private mortgage insurance, is a policy that protects the lender in the event that you, the borrower, fail on your payments.
In other words, it serves as a safeguard for the lender in the event that you default on your mortgage payments. It will provide no advantage to you as a customer and will only cost you money in the long run.
Fortunately, if you achieve 20% equity, or the difference between the value of your house and the amount owed on your mortgage, you may cancel your mortgage insurance and reduce your monthly payment.
7. Property management – someone who will keep an eye on your property and attempt to address any problems that arise without you having to be there.
Even if you aren’t physically there, a property manager can assist you in screening for higher-quality renters and ensuring that your property is performing at its best.
Simply stated, they may make your rental property investment even more passive for you by shouldering the duties you would have assumed if you managed it yourself.
This manner, your property may generate income for you while you relax on the beach, spend time with your family, or start your dream company.
Just keep in mind that they won’t do it for free, so hiring one will be an additional cost.
The Overarching Goal
Making the purpose is everyone’s favorite part!
When buying a rental property, you want to obtain a loan with the lowest interest rate possible so you can save money on interest and make more money from the property.
Remember that a 1% difference in interest rates may save you hundreds of dollars over the course of a year.
If you had a $240,000 loan with a 3% interest rate, your monthly payment would be $1,011.85. You’d pay $1,145.80 instead if you took out the identical loan with a 4% interest rate. This implies you’d be spending more than $1,600 each year!
So, if you’re obtaining a mortgage from a bank, aim to get the lowest interest rate possible so you can save the money for the next transaction.
We suggest that you search around and get an idea of the current mortgage rate online utilizing sites like Credible to get the best interest rate.
Credible is a marketplace where you can compare mortgage rates from a variety of lenders side by side. When it comes to real estate investment, they offer a customized, simple experience. Prequalified prices are determined by your credit history and have no bearing on your credit score.
The housing market is going through a period of explosive growth and rising prices. Investors are buying properties in order to rent them out, but some say carrying out this strategy will not make a profit. Macroeconomics – The economy is the sum total of all the economic activities in the country. Macroeconomics is the study of the economy. Macroeconomics is the subject, and microeconomics is the research.. Read more about how to buy rental property with no money and let us know what you think.
This article broadly covered the following related topics:
- rental property investment
- investing in rental property for beginners
- buying an investment property to rent
- rental property
- income property investments