Buying property as an investment has been a lucrative business for decades, and this investment strategy is a reliable way of making annual income. The real estate business itself is large, but the rental property market has gained lots of popularity.
However, investing in rental properties is more than just buying or renting out an apartment. Several factors such as property value, property taxes, location, and more will affect how much income you bring in at the end of the year. This article covers helpful tips on investing in a rental property for beginners.
How to Invest in Rental Property
Investing in rental properties comes with two main benefits, your properties increase in value over time, and you can choose to sell your properties for a way higher price. Here are some beginner friendly guide on investing in rental property.
Search the Market for a Good Rental Properties
The first and most important step in your real estate journey is to find investment properties. Most rental investors venture into residential properties, and residential buildings are categorized into single-family homes and apartment buildings.
To find a good rental property, you can work with an agent, local wholesalers, or you can look up popular real estate market sites. Once you’ve found a good property to invest in, then it’s time to do your calculations.
First, you need to estimate how much income the property will bring in annually. With this estimate, you can calculate whether or not the money coming in from the property will exceed all your expenses. Factors to consider in this case are your overall costs, mortgage payments, taxes, property management, repairs, and insurance.
Another effective way to estimate a property’s worth is to use the one percent rule. Here’s how this rule works: Simply calculate the rental property’s monthly income and divide it by the purchase price. If the number falls within one percent of the range, the property is well worth the money.
Good Locations Means Good Cash Flow
As a simple investing in rental properties for beginners tip, a good location matters as much as the properties themselves. When choosing a location, you have to put yourselves in the shoes of the tenants and consider what they’ll like.
People are more likely to show interest in your property if it is easily accessible and close to good roads, good schools, healthcare, facilities, and other social amenities. Additionally, consider things like safety and whether the property is far from your residential area to make the property management easier for you.
Furthermore, check the location’s market. If you want to buy homes to rent, always put your money In a market you can afford. You may have insufficient funds to buy a rental property where the market is expensive and on the high end. Additionally, your investment may not provide you with the needed cash flow at the end of the day.
In summary, look at the market and make sure the properties in that area are affordable, in high demand, and with a stable or growing economy.
Financing Your Rental Property
Now comes the important part of actually buying an apartment for investment, which means putting in your money. You’ve to understand that acquiring a residential property is entirely different from acquiring an investment property, and the down payment is the main difference between the two.
If you have a decent credit score and want to buy a house, all you need is a few percent of the purchase price as a down payment to secure the financing you need. In the case of buying a rental property, you’ll have to put down a minimum of 20 percent on the down payment regardless of your credit score.
As a tip, consider putting down a larger down payment to ensure a lower interest rate as long as you have the cash. Once you’ve understood how the down payment works, you can begin looking into the many financing options available to you.
Find Your Tenants
Once buying your first investment property Is a done deal, it is time to get busy. If you want to make money off your investment, then thoroughly screen every potential tenant that shows interest in your property. Don’t be in a rush to give away your apartment to any renter just because they have the cash or because they came early; this might cost you in the long run.
Before giving out your apartment, find quality tenants that can pay on time and maintain your property. Additionally, disqualify any renter with a record of paying their rent late or not maintaining their space.
You can use the services of rental websites to screen your potential tenants, or you can hire a third-party property management company to help you out.
Important Factors to Consider Before Buying a Property
Buying rental properties is one of the best investments in real estate. However, here are a few reality checks to keep in mind before purchasing a rental property:
Tenants Won’t Always Treat Your Property Well
Before looking for an apartment for investment, know that most of your tenants won’t manage the property as much and carefully as you would. Don’t be surprised when you come for an inspection after a tenant moves out and you find ruined carpets, broken floor tiles, missing doors, unapproved upgrades, and even pet damage. However, this is why thoroughly screening your tenants is important.
Repairs Can Come In at Anytime
Like our primary residence, repairs are one thing you can’t escape. You’ll likely need to replace a door, roof, furnace, stove, or floor tile at some point. However, the good news is that you can prepare yourself for surprising repairs by keeping aside a certain percent of your rental checks each month.
Property Taxes Are Beyond Your Control
Note that as your property increases in value, your property taxes will most certainly increase. A town’s tax rate can eat into your profits over time. Additionally, if costs for road repairs and education needs funding, towns can raise taxes without warning.
Investing in rental properties is well worth the time and money, but it also comes with risks. Fortunately, suppose you carefully follow these investing in rental properties for beginners’ tips. In that case, you can easily find the perfect property with good tenants, and you can start reaping your investment profit in no time.