According to research, about 90% of millionaires achieved their wealth through investing in real estate. If you’re looking to join their ranks, investing in rental properties is a great place to start. Rental properties can provide you with a steady income stream and can be a wise investment in the long run.
The thing is, though, many people are intimidated by the prospect of getting started in real estate. They think it’s too complicated or don’t have enough money to dip their toes into this massive investment opportunity.
However, with a little planning and research, real estate investing doesn’t have to be that hard. In this article, we’ll outline the basics of getting started in rental properties. So, whether you are a seasoned investor or just starting out, read on for helpful advice on how to get started in rental properties.
Start By Understanding Rental Property Returns
The first step in investing in rental properties is understanding what you can expect to earn on your investment. Rental properties are unique because they offer the potential for two different types of return: cash flow and appreciation.
Cash flow is the money that comes in every month from renting out your property. This is the money that you get to keep after paying all of your expenses, like the mortgage, insurance, property taxes, and any repairs or maintenance that need to be done.
Appreciation is the increase in the value of your property over time. This can happen for a number of reasons, including inflation, changes in the real estate market, or even just because your property get older and becomes more valuable.
From here, understand the return of investment that you’re looking for. To calculate the ROI of a potential rental property, you need to know a few things.
- The property’s purchase price
- Down payment and upfront expenses
- The amount of money you plan to spend on repairs and renovations
- The expected monthly rent
- The ongoing monthly expenses, like the mortgage, property taxes, and utilities
- The vacancy rate in the area
With this information, you can calculate your potential ROI by subtracting your total investment from the property’s expected annual cash flow. This will give you a good idea of how much money you can expect to make (or lose) on your investment.
Arrange Financing for Your First Rental Property
Now that you know what to expect from investing in rental properties, it’s time to start looking for a property to invest in. The first step is arranging financing, and here are a few ways you can do it.
Get a Mortgage
There are a few different ways to finance a rental property, but the most common way is through a mortgage.
Getting a mortgage for a rental property can be a little different from getting a mortgage for a primary residence, so it’s important to understand the difference. First, you’ll need to have a good credit score and a down payment of at least 20%.
You may also be required to have reserves. This is extra money that can be used to make your mortgage payments if you have vacancy in your property or other unexpected expenses. Some lenders may require reserves that could make payments for up to six months.
It’s also important to understand the different types of mortgages available, as there are a few different options specifically for investment properties. The most common type of mortgage for a rental property is an investment property mortgage, which is a specific type of loan used to finance an investment property.
Another option is a cash-out refinance, which allows you to refinance your primary residence and take cash out of the equity to use as a down payment on an investment property.
This can be a good option if you have built up equity in your primary residence and you’re looking for a way to use it to buy properties.
You may also be able to get a home equity line of credit (HELOC) or a home equity loan on your primary residence to use as a down payment on an investment property. This can be a good option if you don’t want to sell your primary residence, but you have equity that you can use.
You also need to prepare your paperwork if you’re to get financing. This includes your tax returns for the past two years, pay stubs, bank statements, and proof of any other income. You’ll also need a property appraisal and a home inspection.
Your lender will also want to see a schedule of proposed rents and an analysis of the expenses associated with the property. This is where it’s helpful to have a real estate agent or property manager who can help you understand the local market and estimate the amount of rent you can charge.
Start Your Hunt for Potential Rental Investment Properties
Now that you’ve arranged financing, it’s time to start looking for properties. This is where a real estate agent can be helpful, as they can help you find properties that meet your investing criteria.
When you’re looking for an investment property, some of the things you should consider in an ideal real estate investment market will include:
- Low crime rates
- Good schools
- A growing population
- Low unemployment rates
- A variety of housing options
- Ideal property tax rates
- A good neighborhood rating
- Potential for growth
You’ll also want to consider the property itself when you’re looking for an investment property. The most ideal properties will be:
- In good condition
- Not in a flood zone or other high-risk area
- Reasonably priced
You can also look for properties that need some work, as these can be a good investment if you’re willing to put in the time and effort to fix them up. Just be sure to factor in the cost of repairs when you’re considering your potential return on investment.
Hire a Professional Property Management Company
Once you’ve found the perfect rental property, it’s time to start thinking about how you’re going to manage it. If you live in the same city as your rental property, you may be able to manage it yourself.
However, being a landlord is more challenging than it may seem, and you hardly want to find out how bad some tenants can be. A property management service will help you find good tenants, collect rent, handle maintenance and repairs, and take care of other tasks associated with being a landlord.
A professional property management company will also know how to comply with the law, as there are a variety of laws that landlords must follow. This includes things like fair housing laws, safety codes, and more. Having a property manager will help you avoid the property management mistakes you’re bound to make.
A Beginners Guide to Investing in Rental Properties
Investing in rental properties can be a great way to build wealth. However, it’s vital that you do your research and understand what you’re getting into before you purchase properties. By following these investing tips, you can get started on the path to becoming a successful property owner.
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