Investing in a rental property is a great place to start if you’re just getting into real estate. If done right, a rental property can result in a steady flow of cash and the property itself will typically appreciate in value over time. In addition, investors also can claim tax incentives and deductions from owning real estate.
However, while investing in a rental property may seem exciting and lucrative, there’s a lot to learn before you jump in and try it out. This article will share with you a few tips and tricks to be aware of before getting started, including what it takes to invest in properties, common mistakes to avoid, and what you need to know before purchasing your first rental.
First of all, what is a rental property? Essentially, it’s a residential or commercial property that is rented or leased to a tenant for a set period of time. Residential rentals include various types of homes, ranging from single or multi-family. Commercial rentals cover apartment complexes and industrial structures, such as a warehouse, office, or self-storage facility. However, if you’re just starting out, a residential rental property is probably the best, as they are generally less expensive, easier to finance, and easier to manage, as it’s obviously easier to manage a single tenant as opposed to a dozen or more.
The goal of purchasing a rental property is to produce a positive cash flow by making more money than you have to spend on expenses. Depending on the property, this may not be the case at first, but having to turn a property around and build it up to a profitable state is common in real estate.
Owning a rental property is known as an “active” form of real estate; that is, it necessitates in investment of not only money, but of time, dedication, and involvement, and with that being the case, it’s not for everyone. But if you’re that type – or if you engage the services of a reputable property management company to do the work for you – owning a rental property can be a lucrative endeavor.
First of all, determine where you want to invest. Typically, you should be looking for areas that meet these criteria:
- The demand for rental properties is high — housing supply and vacancy rates are low.
- Job growth is stable or growing. Economic expansion, job growth, and population growth are good indicators.
- The average rental income supports the purchase price of the rental property and aligns with the funds you have available to invest.
Next, make sure you know what you’re looking for in a rental property, including:
- Square footage
- Number of bedrooms or bathrooms
- Type of build (e.g., wood or concrete)
- Type of parking available
- Property type (e.g., single-family residence, condo, townhome, etc)
Once you’ve narrowed down your market and know your criteria, you can search for properties to invest in. There are several ways to find investment properties, including working with the multiple listing service (MLS), websites such as Realtor.com or Zillow, a wholesaler, conducting a direct marketing campaign, or working with a real estate investment agent in your area.
Once you’ve found a potential property, it’s vial to run the numbers and determine its net cash flow to see if it can sustain a positive cash flow, either right away or in the future. First, you have to determine how much you’ll be able to collect in rental income, and compare that against any expenditures that are associated with the property, including:
- Property insurance
- Water and sewer
- Homeowners Association (HOA) fees
- Property management (if you use a third-party manager)
If everything checks out, the next step is financing; start the paperwork and underwriting process as soon as possible. Once that is taken care of and the property is yours, you must fill any vacancies that are outstanding. A local property management company can do most if not all of this for you.
Finally, some common mistakes to look out for include miscalculating demand in the area; underestimating expenses and overestimating rents; not keeping up with maintenance and underestimating repair costs; and, in the event of a problem tenant, not starting eviction quickly enough.