Everyone knows that investing in rental property has the potential of providing great returns. However, there are many factors to consider before diving in – not every rental property investment is created equal.
What are the most important factors to consider before making the decision to invest in rental property? A rental property is truly the sum of all its parts. Follow these 6 steps to ensure you invest in a rental property worth your time, effort, and money.
Network with Real Estate Investors and Agents
A crucial step many first-time real estate investors miss is understanding the value of networking with local real estate agents and investors. Your locale may have a real estate association, or maybe a group of investors or real estate agents simply meet for coffee every Thursday morning. Or find an online social media group.
Either way, building these relationships and networking with local professionals may give you key insights and advice tailored to your specific area.
Visit the Bank
Once you gain behind-the-scenes insight from local real estate professionals, it is time to understand what is possible for you. Contact a lender to find out the loan and interest rate you qualify for based on your income, assets, and credit score. While larger lending corporations may offer more money, be wary of their interest rates. Local lenders may also have skin in the game when it comes to real estate investing – a successful, local real estate investment could be just as exciting for them as for you.
This step is crucial before beginning your market search, because this information will help choose market details for you. Comparing several lenders is smart and savvy, as is getting recommendations from others in the industry.
Find a Rental Property
Once you find the rental market that will fit your loan possibilities, it is time to go on a real estate hunt! This is also a great opportunity to involve a real estate agent – another set of eyes and experience could be helpful as you look at properties. You’ll want an agent with years of experience working with investors, as an investors needs are completely different from someone moving into their home.
Another helpful strategy is to first understand what you would consider the perfect renter. Once you understand the kind of person or family you want to rent to, find a neighborhood with real estate to fit that demographic. If your ideal demographic includes renting to a small family, for example, it may not be a good idea to purchase a run-down studio apartment in the middle of town. Considering a property in the suburbs is likely a better idea.
For first-time rental property investors, it’s most often recommended to avoid fixer-upper properties. We all love watching the process unfold on television, but these locations can quickly become a money pit full of unknown surprises. A property needing cosmetic updates – like paint, trim, and flooring – is a great way to use minimal money and time to set your investment apart from the rest. However, if you are personally highly skilled in home renovations and construction, this is a brilliant way to snatch up a fixer-upper and increase your profit margin. Even with these skills and time to do major renovations yourself, budget for much more than you expect for the first few investments.
Tip: Many first time investors will live in the property themselves for a year as they perform the renovations. Living in the home during renovation may be taxing for some, but for others it’s actually easier as you are able to chip away at various projects without driving to another location. It also saves plenty of cash, by not having to pay 2 mortgages and sets of utility bills. Not only does this save money, it gives you the chance to build a true understanding of the property and neighborhood before passing it on to others.
Evaluate Rental Earnings
Once you find a property that meets your loan capabilities and the demographic of your ideal renter, it is time to do some math. Providing a nice rental space for a young professional or family is great, but the true purpose of real estate investing is to make money.
How much income can you expect to generate from this rental property? Compare details of the property to similar properties in the area. This will help you establish a realistic monthly rent collection in terms of the property’s size, location, and amenities.
While researching rental rates in the area, be wary of many nearby vacancies. Are other local properties struggling to find renters for a reason? Use this information to make sure you do not experience to the same struggle.
Add Your Expenses
In the real world, there is no such thing as income without expenses (and if there is, we are all in the wrong line of work!). Define a realistic monthly rent collection, and then work to calculate the property’s expenses that will need to be subtracted from that income. Budget for 1 vacant month per year in between tenants, knowing full well it end up with 2 months vacant or zero. Maintenance costs, utilities, insurance, marketing costs to list the property, and Homeowner Association fees are just a few expenses many rental property owners experience.
As a general rule of thumb, you can expect roughly 25% of your monthly rental income to be paid out to cover expenses; this may not happen every month, but over time. For example, you may need only $500 in minor maintenance the first year, but a new roof or major plumbing issue will come up eventually.
Consider a Property Management Team
Feeling confident in your loan, a rental property, and the property’s ability to pay for itself over time (and put money in your pocket!) is something to be excited about. Before signing your name on the dotted line, however, take a moment to map out a plan for managing the property once it is yours.
Do you plan on handling marketing of the property to potential renters? Will potential or current renters be expected to reach out to your direct email or phone number? Will you stop by occasionally to maintain the property, and make sure everything is in working order? If you are not 100% confident in your ability to maintain the property and the satisfaction of your tenants, consider hiring a property management company to oversee the daily operations of your property. Property management companies are not free, but they can be worth the investment when it comes to saving your time and avoiding costly mistakes.
A property team’s salary amounts to typically 8-10% of your monthly rental income, which is another potential expense to take into consideration. It is important to understand if hiring property help is the right choice for you, your wallet, and your lifestyle. Without property help, make sure you have the time and know-how to navigate the process alone.
Investing in real estate is tempting, especially when you hear and see many investment success stories. Keep in mind that investing in rental property is nowhere near a surefire way to make money. It will take a lot of hard work and will take time to become profitable. Typically, the first 5-10 years are a break-even proposition, but over time your tenants are paying off the mortgage. Eventually you can increase rents to increase profits as property values rise. And at some point, the mortgage is paid off and the profit ratio goes sky-high. Following these research and planning steps may feel tedious but will increase your chances of starting your own investment success story.
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