How to Start Investing in Rental Properties: A Complete Guide
We’ve all seen stories in the media about real estate tycoons who made it big at a young age—but just how do they do it?
Investing in real estate can bring in serious income. Once you own your property, you can see a steady stream of income coming in, without much effort.
However, for many people, getting started is the hardest part. Knowing how to start investing in rental properties isn’t easy, as there are so many things you need to know!
Ready to find out more? If so, keep reading to find our complete guide to investing in real estate, no matter how much you currently earn.
Pay Off Any Debt First
Interested in buying a rental property? While it can be an amazing way to bring in money, for most people, buying property means taking out a mortgage.
For this reason, you always want to pay off any outstanding debt before moving into the property market. If you have credit card balances or personal loans, always pay them off completely before thinking about property.
Not only is this a smart financial move, but it’s something lenders will be looking at. If you have a large amount of debt, this is considered risky by banks and lenders, who might not want to loan a mortgage to someone they don’t think can afford it.
Once you’ve paid off any debts, you can work on saving for a deposit. The larger your deposit, the smaller sized mortgage you’ll need—which is a good thing.
Sort Out Your Funding
Once your finances are in order, you’ll want to seek out pre-approval for a mortgage. If you can pay in full for your real estate investments, then you don’t need to worry, but for most buyers, you’ll want a mortgage to pay for the property.
Once you’ve saved up a deposit, look for a hard money lender that specializes in real estate financing. They’ll get to know a bit more and you and your finances, then work out how much money they can offer you.
If you’re wondering how big of a mortgage you might qualify for, know that it depends on a number of factors. Lenders will consider your income, credit score, any other mortgages you might have, and the size of your down payment.
It can help to get pre-approved for a mortgage before you start looking for property, as it saves time. That way, once you find a property you love, you’ll be in a position to make an offer right away.
Start Doing Research
Next, start doing research on the property market in your area. It’s often recommended to buy rental property within a few hours from your home, as this makes it easier to manage.
However, if you’re going to work with a property management company, this is less of a concern.
What should you look for when researching rental property investments? It’s a good idea to put yourself in the shoes of a prospective renter and think about what they would be looking for when renting a home.
This will include factors like crime rates, the local school district, nearby schools and amenities, and access to highways and airports. As the owner, however, you’ll also want to look into property taxes.
Property taxes can vary based on state or location, so do research on potential costs.
Rental properties are a huge investment, not easy money! For this reason, it pays to do plenty of research on both the type of property you want to buy and potential locations.
You might be thinking about investing in a condo, single-family home, or even commercial property. There are pros and cons to each type of property, so give some thought to which type would best suit your preferences.
Select the Right Location
Rental properties are all about three things: location, location, location! The most beautiful home in the world is no good if it’s in an inconvenient location.
Be very strategic when it comes to choosing the right location. It helps to also think about the type of tenant you want to attract.
For example, if you’re thinking of investing in a single-family home, be sure to purchase in a great school district—this often means you can charge higher rents, since families will pay more for access to a top school.
Decide If You Prefer Short-Term or Long-Term Rentals
Rental properties are often long-term—that is, you rent out your home to an individual or family for a set period of time, such as a year or six months.
However, you might want to consider a short-term rental. This type of property is popular in holiday destinations, like beach towns, so you can rent them out nightly.
Short-term rentals can be very lucrative, but they’re less consistent—you might find it hard to attract vacationers in winter in a beach town, for example.
A nightly rental will also require more upkeep, with cleaning needing to be done between each guest.
In comparison, long-term rentals might bring in less money per night, but a reliable, long-term tenant provides steady income and doesn’t require much maintenance.
When you’re just starting out in real estate, you don’t want to bite off more than you can chew—start small!
An affordable property is going to be easier to manage and is also less financial risk. Keep in mind that you might go through quiet periods where your property is empty for a few weeks or months—even when there’s no rental income coming in, you’ll still need to cover your mortgage.
Work out how much you can afford to pay each month in a mortgage and do some research to see what the average rents are in the area, as this can help you work out how much you’re comfortable paying for a property.
Consider Additional Costs
Remember that there are likely to be ongoing costs in addition to your monthly mortgage. For example, many homes or condos have homeowner’s associations, which charge yearly fees.
You’ll also have to consider yearly taxes, unexpected repair costs, and any advertising costs when attracting new tenants.
It’s a good idea to create a slush fund for your rental property, so that you always have easily accessible cash for things like repairs or renovations.
Understand the Responsibilities of Being a Landlord
Being a landlord is a serious responsibility. Before buying a place, you need to know your legal obligations as a landlord.
There are plenty of considerations and details to manage. You need to know how to legally take a security deposit, understand liability, and know how to deal with a tough situation, like a non-paying tenant.
Maintenance of the property is important as well, as tenants have a right to live in a clean, healthy home that meets all building codes. If a pipe bursts or the dishwasher stops working, you’ll need to take care of the problems in a timely manner.
Landlords who don’t act in accordance with the law can face steep fines, so you need to do everything by the book.
If you treat your tenants well and show them respect, they’re likely to want to live in your home for a long time and will also treat it with care. A bit of compromise and mutual respect is the best way to create a positive, long-term relationship between a landlord and renter.
Choose Tenants With Care
Once your property is ready to rent out, you’ll want to start advertising it. Host open days for renters, then decide which tenant is best for your home.
Legally, you can’t discriminate when selecting a tenant.
Make sure all interested parties complete a thorough application, including references from their previous tenant. You can give them a call to learn more about their experience.
Look for a tenant with steady, long-term income—ideally, someone looking for a home they can stay in for years!
Learn How to Start Investing in Rental Properties With These Tips
Ready to create a lucrative investment property? Use the guide above to learn how to start investing in rental properties, even if it’s all new to you.
The key to success in the real estate market is research and preparedness. If you take your time to plan, make smart decisions, and invest in the right property, you can enjoy great income each month from your new property.
It can help to read more on the topic too, as there are plenty of great books and podcasts on the topic of investing. Once you know what you’re doing, you’ll be on your way to making amazing investments!
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