There are lots of reasons why you might be thinking about investing in rental properties. The US real estate market has a lot to offer to first-time property investors, with a range of opportunities presenting an excellent potential for return on investment. On top of that, rental property investment can provide passive income with less involvement on your part – as long as you start on the right track.
Many new property investors, however, do not understand the fundamentals of buying and investing in rental properties. As a result, they end up losing a lot of money. So, before spending your time and money on the housing market, read this step-by-step guide to learn how to get started in real estate and find out everything you need to know about being a real estate investor!
1) Think About Your Financial Resources
Your first task as a beginner investor is to make sure that buying an investment property is a wise decision – financially. Take a realistic look at your finances to assess how much money you can afford to invest in an income property. Choosing between buying an investment property with a mortgage loan or all-cash is an important decision that will affect your outcome and real estate return on investment.
Paying for a rental property in all-cash can result in higher cash flow or profits. However, this requires a larger capital which, as a beginner real estate investor, you may not have. For this reason, many property investors take out a mortgage loan for buying income properties. Although this often results in smaller profits in the short run, there are many benefits to taking out a mortgage loan when investing in rental properties.
As a real estate investor, you can use the rental income that the property generates towards paying off your mortgage. Another advantage of these loans is that they finance any type of income property you plan to buy (single-family homes, condos, townhouses, and multi-family homes). Also, taking out a mortgage loan gives real estate investors leverage to buy more rental properties with little money! Plus, there are several types of loans that you can choose from for purchasing an investment property.
Related: Buy Rental Property Using a Mortgage or Cash?
To get a better understanding of the financial aspects of buying and investing in rental property, it might be worth it to speak to a financial advisor. This helps you make sure that you’re equipped with the right knowledge and are ready for rental property investment.
2) Research the Real Estate Rental Market
Successful real estate investors always understand the housing market and what’s going on with it. But, just because you live in an area, that doesn’t mean you know what the rental market is like or how it’s going to perform in the future in terms of real estate returns. Thus, for first-time buyers interested in investing in rental properties, being educated about the real estate market is a must.
Keep a close eye on the market trends that affect the rental real estate market. For example, what is the median home price in your area? If homes are unaffordable, a lot of people will choose to rent over buying a house, meaning there’s a high rental demand. Moreover, what is the price-to-rent ratio in your market? A ratio higher than 21 means people think renting makes more financial sense. Look at the occupancy and vacancy rates too – these can be red flags to avoid an area or indicators that the area is renting well.
To find out whether or not your real estate market is a good place for rental property investment, you need to do a rental market analysis. Think of this as a market forecast – it evaluates specific factors that will determine how profitable investing in rental properties in the area really is. Knowing this before buying an income property helps beginner investors avoid any unpleasant surprises after closing the deal.
Related: 5 Steps to Conducting an Accurate Rental Market Analysis
3) Research the Available Property Types
There are plenty of investment opportunities to choose from in the real estate market, and you need to find the one that best fits your goals and needs. For example, are you looking to invest in a modern property or an older one? How big do you want the income property to be? How many bedrooms and bathrooms? What amenities are you looking for? What type of rental property are you interested in investing in? There are:
- Single-family homes
- Multi-family homes (duplex, triplex, etc.)
- Apartments
- Condo
- Townhomes
- Foreclosed homes
- Turnkey properties
- Commercial properties
These (and others) are important questions you need to answer in order to set your criteria. In addition, you also need to determine your strategy for investing in rental properties. What we mean by that is how do you plan to rent out the property for rental income? Generally, beginner investors choose to rent out investment properties traditionally to long-term tenants. An alternative rental strategy to make money in real estate is turning the property into a vacation home and renting it out on Airbnb to short-term guests.
As a matter of fact, renting out a house on Airbnb or similar sites is becoming the optimal rental strategy in the 2019 US housing market. Depending on factors such as your location, an Airbnb rental property investment can bring high rental income, positive cash flow, and a great real estate return on investment. If you’re investing in rental properties this way, however, first make sure to check the short-term rental regulations in your city.
Make sure you do more research into the different property types and think about the best rental strategy for your investment property. Next, use our Property Finder to find lucrative investment properties that match your criteria in a matter of minutes!
4) Understand the Expenses of Investing in Rental Properties
Operating expenses play a major role in the profitability (or lack thereof) of your income property. Beginner investors can easily think they’re making profits only to get hit with an unexpected tax bill that puts them in the red. This is why it’s absolutely essential that you keep track of all your operating expenses when investing in real estate. These include things like utilities, property taxes, taxes on the rental income, maintenance, and insurance on the investment property.
Furthermore, before you buy an income property, take a tour inside and assess the condition of the floors, appliances, walls and other features that are prone to wear and tear. This will help you estimate the necessary costs for upgrades and repairs. Remember, a renovated rental property gives you the advantage of pricing it at a higher rental rate! You should hire a licensed home inspector to examine the potential investment property and give accurate estimates on necessary repairs.
It can be stressful to understand all these expenses associated with investing in rental properties. Nonetheless, it’s much better to do so before buying a property than after you’re stuck with it. A real estate investor needs to be confident about what a property is likely to generate every month. You may not make much money at first, but if you cut down your expenses and make smart choices, you’ll be able to build wealth to invest in better properties that make more money.
5) Rental Property Analysis and Valuation
Don’t jump on putting an offer right after finding an income property for sale that seems to be great for real estate investing. Even if the property matches your criteria, it might not be your best option. The first thing for a real estate investor to do is to value the property. There are different methods for property valuation including the cost approach, sales comparison approach, and the capital asset pricing model. There are also some real estate investing rules of thumb like the 1% and 50% rules.
However, these are all basic valuation methods that give a quick assessment of whether a rental property is worth looking further into. Property investors need to go much deeper and use other metrics for rental property analysis. These real estate metrics include the cap rate, cash on cash return, cash flow, and others. You have to do your homework in this step to get accurate data. If you use the wrong numbers in your calculations, you’ll only be fooling yourself and hurting your financial future!
Related: The Beginner’s Guide to Rental Property Analysis
Being in the 21st century, however, this is made easy with Mashvisor’s Investment Property Calculator. Mashvisor uses predictive analytics to estimates your potential returns from investing in rental properties (both traditional and Airbnb rentals). All you’ve got to do is plug the numbers into the calculator and the tool will do all the work for you. It’ll give you readily calculated data and allows you to do your own calculations to immediately see your cash flow, cap rate, cash on cash return, and optimal rental stagey!
To analyze the best investment properties in your city and neighborhood of choice using our Investment Property Calculator, start out your 14-day free trial with Mashvisor now!
6) Understand Your Rights and Responsibilities
Real estate investing does not end after buying a profitable rental property. Actually, this is when the real work begins. As a landlord of a rental property, you’ll have legal rights and responsibilities in regard to your property and tenants. Most importantly, landlords investing in rental properties must:
- Maintain the property in accordance with local building codes
- Maintain essential services to tenants related to plumbing, heating, and electricity
- Inform tenants about certain conditions affecting the rental property
- Inform a tenant if the rental property and its lease have been sold to a new owner
To protect their real estate investments, landlords have the right to:
- Access the rental property to inspect, repair, and maintain the building
- Collect rent in full and on time
- Collect a security deposit when a tenant signs a new lease
- Carefully screen and select each tenant (without engaging in any form of housing discrimination)
- Restrict a tenant from subletting or sub-leasing a rental unit
- Legally evict a tenant who damaged the rental property or violated the lease terms
Note that there are some laws that are different by the city. For example, in some cities, landlords must give their tenant the first right to purchase before selling the property. In addition, some cities regulate how much you can charge for rent or how much you can raise the rent over a certain time period. So, make sure you adhere to the laws of your housing market when investing in rental properties.
The Bottom Line
Investing in rental properties can be a lot of work and can present some challenges along the way. But, if you’re equipped with the right knowledge and know how to get started in real estate, your return on investment can be much greater than what you’ve originally invested. The real estate market presents promising opportunities and taking that risk might be worth it after all. If you’re ready to start searching for your future income property, try Mashvisor to begin and end your search in 15 minutes!
What are some other important real estate investment tips beginners should keep in mind this year?