UPDATED: Apr 17, 2023
Real estate investing can be a lucrative asset to add to your financial portfolio. There are many ways to invest in real estate, but purchasing a rental property is one of the most common methods. Whether you have short-term or long-term tenants, rental properties are assets that just keep giving. Whether it’s a multi-family or single-family house, purchasing a rental property can be a rewarding, safe investment – even in uncertain markets.
If you’re thinking about purchasing a rental property, but you’re not sure where to get started, there’s no need to worry – we’ve got your back. Let’s dive into the things you need to know about this form of real estate investing.
Renting out a house is different from other real estate investments for many reasons. Instead of flipping a home and selling it to the next owner, or simply buying trusts, you will be the sole owner of the property, making you fully responsible for most upkeep. The property’s mortgage will be under your name, so you will also be responsible for monthly mortgage payments, but your tenants will be responsible for paying you monthly. Simple enough, right?
We’ll dive more into this later but keep this fact in mind.
Unlike selling homes, rental properties are assets that can produce consistent money flow. In general, a landlord (you) would arrange your finances and purchase a property. After purchasing the property, you would go through your state’s requirements to bring it up to code. Each location has its own rules, so it’s important you do your research here.
After your property is brought up to local codes, you should take a look at the overhead costs for maintaining the property. Mortgage payments and property taxes, along with any amenities you decide to include, should be factored into this number. From there, you should take a look at your property’s worth, and compare it to other units in the area to determine how much your future tenants would pay. You would then draft up a lease agreement, outlining any stipulations you might have. After everything is in place, you can let potential tenants know by posting to websites or putting up “for rent” signs in your yard.
Generally speaking, owners of rental properties have long-term rental agreements with their tenants. This means that you rent out a unit for at least 6 months to the tenant(s) outlined in a lease contract. The tenant(s) will then be responsible for paying rent to you on a monthly basis until their lease is up. Afterwards, tenants can choose to renew their lease, or start fresh somewhere else.
If you decide to invest in short-term rentals, this process would be a bit different. A short-term rental is, just as it sounds, only intended for short term stays. This could be any time period ranging up to 6 months. In short, a renter can pay for a 2-night stay, or a 4-month stay – it ranges. Usually, instead of setting a monthly rate, you would charge tenants by the night. This rental arrangement is most common for people looking for vacation stays, and companies like Airbnb make this possible. The laws surrounding short-term rentals vary from common long term lease agreements, so make sure you do your research to determine which investment is best for you.
Because the rental market is relatively predictable and stable, it often makes a good investment. Still unsure about why you should invest in a rental property? A few of the pros include:
Like all things good, there are downsides involved in purchasing a rental property. The list of cons include:
The process of purchasing an investment property is similar to that of a personal home, but there are a few stipulations to consider before you make the jump.
Start by researching landlord criteria, property management, local laws on rental properties and the different types of investment properties before you get started. Every situation is unique, so make a decision based on your circumstances.
If you’re not buying a property with cash, you will likely start looking for mortgage lenders at this stage. The exact financial requirements will depend on your situation, but you should expect these numbers on average:
There are several mortgage options for buying rental properties, but there are stipulations in place for certain loan types.
There are so many factors to consider at this step. Most importantly, you will you need to consider the best places to invest in real estate and the different property types. Finding a rental property that’s a good investment can be a tricky task, but it can be done.
What should you look for? Neighborhoods that are well-kept, well-maintained and offer ample access to restaurants, shops, parks and other amenities are often in popular demand, so that’s a good place to start. You should also consider the general types of houses in an area and decide if your rental property would be a good fit. Are there ample duplexes in the area, or are there plenty of detached, single-family homes?
The exact circumstances will depend on the kind of rental property you are looking to create, so crunch your numbers, do the research and invest in what makes the most sense to you.
Return on investment (ROI) is a metric that helps real estate investors evaluate whether they should buy an investment property. Although it may sound complicated, most ROI calculations are actually very simple. In general, the ROI of an investment is equal to the gain minus the cost, divided by the cost.
In an equation format, that looks something like this:
ROI = (Annual Rental Income − Annual Operating Costs) ÷ Mortgage Value
Before you settle on a property, run the numbers to make sure it makes sense. Real estate investing is a long-term commitment that requires sound decision-making.
After you’ve purchased a property and begun leasing it out, it’s time to manage and increase your rental income. While you cannot raise a tenant’s rent in the middle of a lease cycle, you may start considering if you will increase prices after this cycle is up. If you are leasing a vacation home, you may start wondering if you should increase the nightly rates once you realize your property is a hit. Regardless of what you decide to do from here, after ensuring your overhead is paid, you might want to start setting some cash aside to invest in more properties.
A few additional tips to remember when you’re buying a rental property include:
In short, purchasing a rental property can yield long-term benefits, but doing so does come with a list of cons. Adequate upkeep and effort will be required to make the most of your investment property, but your hard work will be rewarded consistently. We know it can be scary, but with proper preparation, the money is yours to be made.
Interested in purchasing a rental property? Start by researching current trends in real estate. Afterwards, it’s time to contact a local real estate agent, find a promising investment property, and compare interest rates, loan options and rental property real estate mortgage lenders.
When you’re ready to take the leap, our friends at Rocket Mortgage® are ready to offer the tools that you’ll need to get started. We wish you the best on your investment journey, good luck!
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