Real estate investing has gained popularity in recent years thanks to reality TV, the internet, and a booming real estate market. In fact, the internet is full of gurus who make big promises to teach you their secrets on how to become a millionaire by flipping fifty houses in ten days!
That’s an obvious exaggeration, and we love a good guru, but what if we told you that you don’t have to flip to make money purchasing investment properties?
While it’s not realistic to think that one 30-minute course contains all the knowledge you need to unlock the fast track to financial freedom, real estate is one of the best income-producing assets you can acquire.
Investing in rental property can be highly lucrative, even for a novice investor.
How Does Rental Property Investing Generate Income?
Cash Flow and Appreciation are the two main ways to generate income through rental real estate investment.
Positive Cash Flow Income
Simply put, cash flow income is generated by renting your property out at a rate that exceeds your total monthly expenses to maintain the property. Most people start out investing in rental properties with this goal in mind.
Appreciation is more of a long game. It is an increase in the value of your property over time. Most owners can expect their appreciation rate to be between 1% and 5% per year in the right area.
Several factors contribute towards the appreciation of your property:
• Population Growth
• New Development
• Property Improvements
Appreciation through population growth is all about supply and demand. Increased population generates a higher demand, driving up the price value of your investment.
Neighborhoods that are being newly developed or redeveloped typically increase demand in the area. When your property is in demand, it increases the value of your property in the long run and makes it more attractive to higher-paying tenants now.
The beauty of investing in rental property is that your tenant will be the one paying down the principal on your loan, which builds equity for you. You can leverage that equity to make improvements or purchase additional properties.
Any upgrades you make to your property that make it more attractive to potential tenants and future buyers can increase the overall value.
What to Do Before You Start Your Rental Property Search
You really don’t have to be a financial wizard to build wealth through real estate investment effectively. Still, it is essential to remember that it can also carry significant risks if you haven’t done your due diligence before leaping.
Here are a few things to research or complete before you start the search for the perfect property:
• Create a Network
• Evaluate Your Personal Finances
• Secure a Down Payment
• Get Pre-approved
• Consider Expenses
• Know Your Legal Obligations
Create a Network
Thanks to the internet, specifically social media, it is simpler than ever before to find networking events. Check social media posts for your area to find local meetups for real estate investors and professionals in your area.
Networking events create a solid opportunity to gain knowledge from experienced property investors and build a network of resources that you will likely need down the road once your property is up and running.
Evaluate Your Personal Finances
Is it wise to get a loan to invest in real estate? Ensuring you are financially fit before investing in rental properties is imperative to successfully securing the best financing for your investment. If you have medical bills, unpaid student loans, or any accounts in collections, you should clear that debt first.
You should only move forward with financing a property while you have unpaid debt if you find a property that generates enough positive cash flow to cover your existing debt.
Secure a Down Payment
You should anticipate paying a larger down payment for your investment property than you would for an owner-occupied property. It would be wise to budget around 20-30% of the purchase price of your property.
Leveraging the equity in your primary residence, seller financing options, and hard money loans are a few ways you can purchase properties without a large out-of-pocket down payment.
In this competitive market, timing can make or break your deal. You can be confident that if you are interested in a property, ten other investors are knocking on the same door. Being fully prepared ahead of time means you can save time and hit the ground running.
As with any significant decision, preparation is half the battle. The more information you gather upfront, the higher your chances of success.
One of the most dangerous miscalculations a rental property owner can make is underestimating the cost of maintaining the property. Your expenses include more than just your mortgage and property taxes.
It’s a good idea to budget 20-30% of your rental income for repairs, maintenance, emergencies, and vacancies. Having an emergency fund can protect your investment if there is an unexpected problem down the road.
Know Your Legal Obligations
Landlords need to be familiar with landlord-tenant laws in their state and locale. Being familiar with your obligations relating to tenant rights, security deposits, lease requirements, eviction rules, and fair housing can help you avoid legal hassles.
Start Your Property Search
Searching for the right property is the fun part for most investors, but how can you know if the property you want to purchase is a wise investment? Most factors that determine whether or not a rental property will be profitable revolve around the location.
When researching if an area is suitable for you, consider these factors:
• Job Market
The neighborhood you buy in will have a significant impact on the type of tenants you attract. Most experts suggest new rental property investors start with single-family homes in a family-friendly neighborhood.
Renters and potential buyers are likely to look at the local school ratings to understand the area better. Purchasing in a neighborhood with poor school performance can increase your chances of vacancy and potentially decrease your ability to see the property in the future.
Check the crime rates in the area. The local library and police precinct can provide you with accurate and up-to-date crime statistics in the area. Purchasing property in high crime rate areas can risk your tenants’ safety and your property.
The US Bureau of Labor Statistics is an excellent place to gain insight into the local job market. Rising employment rates not only attract more tenants but also helps with the appreciation of your property.
Ride around the area if you are local or do some internet searches to see what amenities are nearby. Up and coming areas will have local parks, gyms, shopping centers, and plenty of entertainment options nearby.
Decide Who Will Manage Your Property
Managing your own property can feel more like an exhausting second job than the passive income you might be hoping for. While many landlords choose to manage their own properties, working with a property manager can help maximize your potential for success.
While shelling out 6-10% of your rental income may leave you feeling some sticker shock, many rental property owners find that the benefits of working with a property management company are well worth the fee.
The list of services that a property manager can provide is extensive but include:
• Marketing Strategy
• Tenant Screening
• Repairs and Maintenance
• Rent Collection
• Lease Renewal
Partnering with a professional property manager can help you earn a passive income by handling your rental’s day-to-day operations and maintenance.