Are you considering buying a rental property but don’t know anything about leasing, mortgage financing, tenant-landlord relations, and property management?
We’ve all heard about how promising the real estate market is and how lucrative rental properties are, and now we are considering getting into it ourselves instead of just standing on the sidelines.
But like most people, I’m guessing you only have surface-level knowledge about what investing in rental properties actually entails. This is why in this article we will be going over everything you need to know to start investing in rental properties.
- Introduction To Rental Property Investing
- Assessing Your Financial Situation And Setting Investment Goals
- Researching Potential Rental Markets And Properties
- Securing Financing And Funding Options
- Buying Rental Properties
- Building A Team Of Professionals
- Making Necessary Repairs And Upgrades To The Rental Property
- Marketing The Rental Property And Finding Tenants
- Frequently Asked Questions
- Related Post
Introduction To Rental Property Investing
It has become quite common for people to go into real estate investment as a simple way to create passive income when property values appear to be rising at a rapid rate.
However, you must be ready for the possibility that real estate won’t pay off right away, just like any other investment.
This is particularly true when buying rental properties, which typically require more maintenance and attention than you had anticipated.
Contrary to popular opinion and several real estate books and training, buying rental properties is not a way to generate passive income.
It is one of the types of real estate that is most time-consuming and requires you to be actively involved. That is of course if you want everything to run smoothly.
Owning rental properties or investing in them can be quite time-consuming, taking up enough time to feel like taking on a part-time or full-time job, depending on your level of dedication.
Before you invest in a rental property, you need to determine your investment strategy and whether you want to be a hands-on landlord or delegate the work to someone else.
You have the option of either managing the property yourself or hiring a property manager. Having a property manager usually costs between 8% and 12% of the rent received but it might prove to be worth it especially if you are new to real estate.
A property manager will be in charge of repairs and maintenance, as well as interviewing potential renters and dealing with rent that hasn’t been paid.
This gives you free time if you have other engagements like another job or if you would just prefer a hands-off approach.
Investing in rental properties can be profitable, but it also has advantages and disadvantages, just like any other investment. If done right, it can become a steady source of income.
Assessing Your Financial Situation And Setting Investment Goals
The first step to investing in rental properties is to assess your financial situation to determine if you’re ready to take on this type of investment.
This involves looking at your income, debts, and other financial obligations, such as your monthly expenses. You’ll want to calculate your net worth and determine your cash flow to understand your current financial situation.
Do you own a building? If not, how are you going to get the money to buy or rent one? Do you have enough money set up for emergencies to last you for six months? Do you have any personal loans or credit cards with high-interest rates?
Do you have enough money in savings to cover debt-free expenses between renters, such as upkeep, insurance, or a mortgage? These are some of the questions you need to ask yourself.
You also need to consider your investment goals. Determine why you want to invest in rental properties and what you hope to achieve.
Are you looking for long-term cash flow or hoping to build equity over time? Your goals will help guide your investment decisions.
Getting answers to these questions will help you decide whether or not to start investing in rental properties. It will also give you insight into what you are getting into.
Researching Potential Rental Markets And Properties
As a potential investor, researching rental markets and properties is an important step to take before investing in rental properties. This helps you to make informed decisions on what kind of properties to invest in.
You need to look for areas where there is high demand for rental properties, low vacancy rates, and good potential for growth.
You can also look at demographic trends, job growth, and economic indicators to determine the best rental markets to invest in.
This is where choosing the type of rental properties to invest in comes in. You can invest in either residential or commercial rental properties.
Both options are a good choice if your end goal is to achieve a source of passive income. They do, however, differ in significant ways.
Investing in residential rental properties means renting units out to a person or people as a primary residence. Your potential tenants will be families, young adults, students, and basically anyone in need of a place to live.
Buying residential properties often starts cheaper. Banks typically accept lower credit ratings for residential mortgages than they would for commercial loans, making them more accessible.
Additionally, there is a greater demand for residential properties, making it simpler for you to fill your apartments.
On the other hand, investing in commercial rental properties means renting out buildings or units to companies for business purposes. Commercial real estate requires mortgages which are more complicated than residential mortgages.
Securing Financing And Funding Options
You’ve finally decided on a property. If you’re like the majority of investors, you’ll have to take out a loan to buy it. This means finding the right mortgage lender, negotiating the terms, and paying a deposit.
Types Of Mortgages
There are multiple kinds of mortgages. The two most popular types of mortgages are fixed-rate and adjustable-rate loans.
While adjustable-rate mortgages have an initial fixed rate that fluctuates as the loan matures, fixed-rate mortgages have an interest rate that remains constant for the entire term of the loan.
The benefit of a fixed-rate loan is that it protects the borrower from abrupt, potentially large increases in their monthly mortgage payments in the event that interest rates rise.
Mortgages with fixed rates are simple to understand and have few differences across lenders. However, the disadvantage of fixed-rate mortgages is that when interest rates are high, getting a loan is harder because the payment is much more expensive.
Also read: NHF Real Estate Development Loan (2023 Detailed Guide)
On the other hand, an adjustable-rate mortgage is significantly less expensive than a fixed-rate mortgage, at least for the first couple of years.
ARMs are especially promising because, in a situation where interest rates are falling, they typically allow the borrower to qualify for a larger loan and allow them to benefit from lower interest rates and lower payments without having to renegotiate the mortgage.
Adjustable-rate mortgages are typically suitable for short-term investments so if your investment in rental properties is a short-term plan, you could go for an adjustable-rate mortgage. Otherwise, a fixed-rate mortgage is a better option for you.
Buying Rental Properties
Once you have identified the type of rental property to invest in and how you will finance it, you can then evaluate potential rental properties in the area.
Look for properties that have good rental yield, positive cash flow, and potential for appreciation. You should also consider the condition of the property, its location, and potential repair costs.
You can search for properties online, work with a real estate agent, or attend local auctions. You can get some real estate investing information about properties from sites like Zillow.com, including rental rates and current property valuations. You can also learn about market rental prices for vacation homes or condos from websites like Airbnb.com.
Once you have concluded on the property to buy and how to finance it, the next step is making an offer. You can negotiate the price, terms, and closing costs. But you have to be careful not to set the bar too high, otherwise, you might end up overpaying.
You might want to enlist the help of a real estate agent at this point to ensure you get a good deal. And while you’re at it, you should also get a lawyer to oversee the legal aspect.
Also read: Top 20 Co-Working Spaces In Lagos (Buy or Rent)
Once you have agreed to the terms, you need to complete the necessary paperwork, pay the closing costs, and transfer the ownership.
Congratulations! You’re now the owner of a rental property. But that’s not all, there is still a lot you have to do like finding tenants, maintaining the property, and collecting rent.
Building A Team Of Professionals
When investing in rental properties, it is essential to build a team of professionals who can provide you with guidance and support throughout the process.
A good team of professionals can help you make informed decisions, minimize risks, and maximize returns. A good start would be enlisting a real estate agent, a property manager, an accountant, and a lawyer.
Depending on preference and budget, you can also bring in a mortgage broker, or an insurance agent, along with other professionals in the real estate industry.
Each professional brings a unique skill set and expertise to the table, and working with them can help ensure a successful investment. However, you must choose professionals with experience in the rental property market and a proven track record of success.
Making Necessary Repairs And Upgrades To The Rental Property
Before looking for tenants for your rental properties it is a good idea to make any necessary repairs and upgrades.
This can significantly increase the value of your property, prevent further damage, and reduce liability risks.
The first step is to conduct a thorough property inspection. The inspection should cover all areas of the property, including the structure, plumbing, electrical, HVAC, and appliances. You can either conduct the inspection yourself or hire a professional inspector to do it for you.
After conducting the property inspection, you should prioritize the repairs based on their urgency and cost.
Repairs that pose safety hazards, such as faulty wiring or leaking gas, should be given top priority.
Prepare a budget for the repairs. Allocate a reasonable amount for the repairs, and ensure that you have enough funds to cover the costs. Compare the costs with different contractors and pick the suitable one.
When investing in rental properties, you don’t want to end up spending a large amount of money on repairs so it is advisable to avoid rundown buildings, even if they are cheaper they more often than not are not worth it.
Marketing The Rental Property And Finding Tenants
Now all that’s left is to get people to rent units in your rental properties. You can put up ads on social media platforms such as Facebook, Instagram, and Twitter.
You can also advertise online by creating listings on popular real estate websites such as RealtyNub, Zillow, Trulia, and Apartments.com.
These websites attract a large number of potential tenants and provide the ability to upload photos, virtual tours, and detailed descriptions of the property.
You need to use compelling property descriptions in your ads. A well-written property description can help attract potential tenants.
Use descriptive language to highlight the property’s best features, such as its location, size, and amenities.
Offer virtual tours of the property to give potential tenants a realistic view of the property. You can create a video tour of the property or use virtual reality technology.
You could also partner with local businesses such as real estate agencies, relocation companies, and employment agencies. This will help you market your rental properties to a wider audience.
Frequently Asked Questions
What Is The Best Site To Find Rental Properties?
Some of the best websites to find rental properties include Realty Nub, Zillow, Trulia, Apartments.com, Redfin.com, Homefinder, and ReMax, among others.
Are Rental Properties In Demand?
The demand for rental properties varies depending on several factors such as location, economic conditions, demographics, and lifestyle trends. However, it is always in demand because it is a flexible, affordable housing option.
In conclusion, investing in rental properties can be a profitable long-term investment. By following the steps outlined above, you can minimize risks and maximize returns on your investments.
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