An informative guide to investing in rental properties for beginners.
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There are many ways to make money in real estate, but investing in rental properties is by far the most lucrative, offering investors a twofold investment return; a steady residual income from the monthly rental and the equity from the property itself. Building wealth from rental property investments should not be taken lightly though; there are many things to consider before you purchase your first property. Here is a practical guide to investing in rental properties for beginners.
Look for properties that will require little or no repairs to get it ready to rent, down time means you will have no income from the property until it is rented. It is also important to use a balance sheet for each property that you intend to rent, this will show you how much you have invested in the purchase and repairs with the amount of return you can expect once the property is rented. Every detail of your investment strategy should be well planned with attention to the day to day management and maintenance as well as rental contracts. It is a good idea to also have a list of qualified repairmen to handle any potential emergency situation. You should also research the area you plan to rent in. Knowing the personal and financial climate of the area will give you valuable information to help you determine if the location is right for you.
Properties in popular seasonal locations have the potential for higher rental rates realtor commission and could also be rented weekly. Another great rental investment idea is business property, rental rates are almost always higher for this type of property and most rentals of this type require a long-term commitment. Consider each possible rental property you view with its overall potential for quick profit, and ask yourself; is this an ideal location for such a property? How quickly can this property be ready to rent? What is the total amount I will need to invest, and what is return amount on my investment?
If you plan on purchasing your first rental property with a loan, then you will need to develop a spread sheet for the property you intent to purchase. A typical spreadsheet will cover a 12-month time line and include all income and expenses for the property; most of this information can be found in your personal balance sheet you created for the property. Along with your spreadsheet you will need to have a business plan that outlines your proposal to purchase and maintain your rental property. Your business plan should include the type of property you plan to rent, how you intend to manage and maintain your property and be sure to include any information that shows your ability to be profitable; a popular seasonal location or high traffic business or commercial property or other rental property with a high profit potential. You will also need to include how you intend to overcome any potential obstacles. Investing in rental properties for beginners is a lucrative means to achieving a long term residual income.
If you are just starting to get into rental property investing, the first thing you must do is to formulate a strategy. There are 3 main steps to do this:
Step 1: Determine Your Objective and Time Horizon
The first consideration is your objective and time horizon, both of which go hand-in-hand. Are you looking to turn a quick profit by holding the property for 1 year and then flipping it? Or is your objective to build long-term equity by holding and renting out the property? Really, the only thing to consider here is your access to capital, which includes cash on-hand as well as access to non-bank loans. Unless you have access to a lot of capital, or you are operating in a white-hot real estate market, you'll probably find it difficult to execute a short-term flip strategy because you must factor in holding and selling costs.
Step 2: Determine Your Targeted Property Type
Next, you must choose your preferred property type. You can be a real estate investor in a variety of ways, but for "small time" investors 2-4 unit multi-family properties generally make the best choice. This is because rental income tends to be substantially higher by virtue of having multiple units, yet overall expenses are only slightly higher than, for example, a single-family home. Plus, you will avoid commercial status as well as the extra inspection scrutiny that properties with more than 4 units must deal with.
Usually, old properties (50 or more years old) in older neighborhoods offer the most value. Additionally, you'll want to focus on properties with multi-bedroom units. Not only do 2-3 bedroom units command more rent, but they also tend to have a more stable tenancy compared to 1-bedroom units.
Step 3: Determine Your Target Area
The third key factor to determine is where you will purchase your rental properties. You'll want to focus on a town or a county that is no more than a 30-minute drive from your home. Anything farther than that is too difficult logistically and will consume too much of your precious time. I also recommend focusing on areas that are upper-lower class, as properties in these areas are relatively cheap, tenants are plentiful, and the "clientele" is better than middle-lower class areas so management is less stressful.
The best way to find your target area is to grab a map and drive through all the towns within a 30-45 minute drive from your house. As you drive around, look for lower-tier neighborhoods that are "in transition," where houses are being fixed up and property values seem to be rising. Stay away from areas in complete disrepair.
This driving expedition should allow you to narrow down your choices to just a couple of towns. You can then look at multi-family listings within each area (use a site like realtor.com) and compare the list prices with those in other, nearby towns to get a sense of the affordability of investing in that specific target area.
Putting the Pieces Together
That's all there is to it. To sum up, the overall strategic framework is as follows: