What Are Rental Properties in Real Estate Investing? Rental properties are real estate properties that are rented out to tenants in exchange for a nightly, weekly, or monthly rent.
In real estate investing, rental properties are among the most popular type of investment properties, especially among beginner real estate investors.
There are a number of unique aspects and advantages that any real estate investor should consider when investing in a rental property. Among these factors, the most important ones that you should focus on are:
- The types of rental properties
- Rental property management
- Passive rental income
- Financing
In this article, I will briefly explain what these aspects and features mean and how they can affect your real estate investment, and why they should be taken into consideration before purchasing an investment property for the purpose of renting it out.
The Types of Rental Properties
Before investing in a rental property, it is absolutely crucial to be aware of the two different types of rental properties.
A rental property can be categorized into two types based on the duration of the tenant’s stay in the property. These two types are long-term rentals and short-term rentals.
Long-Term Rentals
Long-term rentals, also known as traditional rentals, are real estate properties that are rented out for extended periods of time which typically last from a few months to several years.
This is the most common type of rental properties, and the easiest to manage, making them the perfect choice of investment properties for beginner real estate investors.
Want to learn more about long-term rentals and their advantages and disadvantages before deciding on the type of rental property that you want to invest in? Click here to learn all about long-term rentals in real estate investing.
Short-Term Rentals
Short-term rentals, also known as Airbnb, HomeAway, or VRBO depending on the company that manages them, are real estate properties that are rented out for shorter periods of time which can last anywhere from a single night to a couple of weeks.
Short-term rentals are a relatively new concept in real estate which was made popular with the emergence of Airbnb. Short-term rentals have a number of important factors related to them, such as the legal issues that they face in certain cities around the world, and the fact that they are considered more difficult to manage and might require more experience before getting into them.
However, short-term rentals also have a higher potential for profits when planned and managed properly, making them a very popular choice among full-time real estate investors.
Want to learn more about short-term rentals and their advantages and disadvantages before deciding on the type of rental property that you want to invest in? Click here to learn all about short-term rentals in real estate investing.
Rental Property Management
Another major aspect related to rental properties is the rental property management.
Rental property management refers to managing all the different aspects of a rental property, from tending to the tenants to handling maintenance and collecting the rent.
These tasks require a lot of time and effort into managing the property. If you’re a part-time real estate investor and you have another full-time job, you might not be able to manage your rental property on your own.
This is where the role of professional property management companies comes in.
A real estate investor can hire a professional property management company to manage all the different aspects of his/her investment property, but it comes at a cost.
Most professional property management companies will typically charge you a portion of the rental income that the property generates, with the average rate being 8-12% of each property’s rental income.
This, however, can be a very useful service to hire for real estate investors who do not have enough time to manage their own properties, or who do not want to go through the hassle of managing the property and tending to the tenants.
Passive Rental Income
Rental properties are among the best options when it comes to generating a passive income when investing in real estate.
While a rental property will not necessarily generate a rental income passively, and in most cases will require an extensive amount of time and effort to be invested in it, it is definitely possible to turn a rental property into a passive income property.
Long-term rentals, in general, are easier to generate a passive income from because they require less management. However, any rental property can be turned into a passive income property if you opt for hiring a professional property management company, which can eliminate the need for you to personally manage the property.
The passive rental income that rental properties can generate can be invaluable for real estate investors, especially part-time investors, as it can be considered as a stable source of income which replaces or complements the income that you generate from your day job.
Financing
One of the biggest advantages of investing in rental properties is related to financing your investment.
More specifically, if you’re purchasing an investment property using a mortgage loan, a rental property will have the advantage that the tenant renting your property will be the one who’s paying off your mortgage for you.
Basically, if you own a rental property through a mortgage, and your mortgage payments are $500/month, while your property’s monthly rent is $800/month, it means that your tenant will be paying you enough money to cover for the mortgage payments and still have $300 left to spend on other expenses or to go straight to your wallet.
This makes rental properties even more accessible to beginner real estate investors as it greatly reduces the amount of risk associated with investing in real estate, such as getting stuck with a mortgage that you are unable to pay down.
Bottom Line
Rental properties are the most favored type of investment properties in real estate, especially among beginner real estate investors, for a number of reasons. If you’re considering getting into real estate investing, then I highly recommend that you start off by learning about rental properties, their types, and all the other aspects related to them as this type of investment properties might be the most suitable for you.
Don’t forget to check out our articles that are mentioned above to learn more about short-term and long-term rentals in order to decide on the most suitable type of rental property for you to invest in.