Rentals are a lucrative approach to real estate investments. They offer a constant stream of passive income and minimize costs, provided the owner conducts in-depth research beforehand and employs the correct rental property investment strategy. However, beginners to the system may find rental property management challenging — and that’s understandable.
This lesson provides a complete guide to investing in rental properties in concise paragraphs to ease understanding. Keep reading for valuable insights from established rental owners.
What Are Rental Properties?
Rental assets are properties that a tenant leases or rents to live or conduct business over a fixed period. These properties are either short-term (vacation rentals) or long-term (one-to-three-year leases).
Residential rental assets include single-family apartments, duplexes, triplexes, and quadplexes, while commercial rentals include retail spaces, office spaces, industrial (self-storage or warehouse), and apartment complexes (multifamily).
Typically, these properties require less upfront cash; therefore, they are more accessible and easier to finance. Managing these assets is also easy, although there may be exceptions, particularly when you have a high tenant count.
What Are the Necessary Rituals Before Rental Property Investment?
Has everyone insisted on the profitability of investing in rental properties? If yes, they aren’t far from the truth, but — as initially mentioned — you have to meet specific criteria.
Various factors determine the gain-realization ability of a rental investment property. Therefore, it’s essential to look at these factors before you splurge out your cash.
1. Where Do You Want to Invest?
Location is often the most critical consideration when working out an asset’s value. Why? You may revamp the property and improve the leasing terms, but its location is unchangeable. Potential investors should research the market to find out the most lucrative rental markets of 2021 for a start.
Alternatively, you may first select a state and then research the most profitable parts of the state.
The first factor to consider when selecting a location is your finances. It’s often easier to manage rentals close to your residency, but what if property costs are high in your neighborhood? It may be best to look at markets that cost less and invest in them.
In addition, you should look at the demand for rental properties in the area — avoid places with high housing supply and vacancy rates. How are job growth, economic expansion, and population growth too? Does the median rental income commensurate with the property purchase price? It’d be unwise to spend over $300,000 on an asset if you may only lease it for $1,500.
2. What Do You Want to Invest In Now?
Single-family homes are the easiest rental property to manage, but that doesn’t mean it’s impossible to earn significant returns from a duplex, triplex, or quadplex. An important consideration is to determine if you’d prefer to own short- or long-term rental assets.
The dominant type of rental property in an area is also a criterion. Determine if a particular property type is oversupplied or undersupplied in the market. An area may, for instance, have too many single-family apartments and really few two-bedroom flats for rent. Diversify the options in the neighborhood.
Our complete guide to investing in rental properties recommends assessing current inventory on websites like HotPads and Zillow or finding a local realtor in the area.
3. Find the Ideal Property
Finding rental investment property for sale is easy these days, thanks to the presence of listing sites like TheShortTerm Shop in Florida and Alabama and the complete guide to investing in rental properties. Such websites allow potential investors to narrow down their search, determining where and what they would like to make their investment. You only have to select the specifications you’d appreciate in the property and hit the search bar.
However, the possibilities are endless in this regard. You may prefer to purchase a turnkey rental asset (a company-managed property that requires the littlest effort from you after buying). Also, an investor may consider putting out bandit signs or organizing marketing campaigns, although this option may be expensive compared to using listing sites.
4. Evaluate the Asset and Run the Numbers
You’ll find numerous rental properties that fulfil the requirements you desire, and let’s not forget that profit maximization (not just realization) is the objective. Therefore, it’s imperative to figure out the potential net cash flow of all assets you’ve shortlisted before making a final decision. You may derive the net cash flow by subtracting expenses and payments from the rental income.
The first step is to estimate the likely rent that you may realize from the property. You may get this figure by researching the average rental rate of the neighborhood and comparing the properties with yours. How does your asset compare to others in the area?
An outdated investment property may not attract tenants, or it may do but at poor returns. Hence, only purchase subpar properties if you’re willing to do the renovation. Lastly, remember to check for associated costs, such as taxes, insurance, garbage, water and sewer, Strata management services or homeowners association fees, maintenance (1–3% of the asset value), and advertising.
5. Pay Up and Figure Out Tenancy
The next step is to pay for the property if all conditions satisfy you. You may apply for a mortgage if you’re short of funds. Most banks accept a 20% down payment, but it’s advisable to pay higher for better interest rates. An attorney (remember the fees) may help if you have issues with the paperwork.
Choosing a tenant follows after settling your financial affairs. To do so, you must screen all applicants to ensure you select a person who’ll not thrash your agreement. A bad tenant is a sure way to realize insufficient returns on your property. To be certain, use reliable tenant screening services to research prospective tenants and decide whether they are suitable for approval as tenants.
The standard recommendation is to select a tenant with a net worth that’s three times the value of your property. Also, the renter should have a stable income source and a minimum credit score of 620. Conduct background checks, too — contact previous landlords and ask for criminal records.
Lastly, it’s important to delineate all rules and regulations guiding the tenant. Set out a clear direction on pet-keeping, property altering, painting restriction, vehicle parking, rent due dates, payment method, and other peculiarities. This step will help to prevent misunderstandings along the lines.
Investing in rental properties for beginners may not be a straightforward affair. Thanks to the required research, considerations, necessary paperwork, and tenancy sorting. Luckily, this complete guide to investing in rental properties above may be of good help.