The real estate sector offers a broad range of investment possibilities for old and new investors. However, you must know what the industry entails. While the prospect of making passive income from your property can be appealing, there are potential pitfalls you may want to avoid.
Rental property investment is one way to break into the real estate sector or expand an existing portfolio. Check this complete guide to investing in rental properties to learn how to maximize your investment.
Reasons to Consider Investing in Rental Property
Rental properties are a good investment for the following reasons:
Rental Properties Offer More Than One Way of Earning Income
Rental property offer income potential from four sources:
- Cash flow from rent
- Tax benefits
- Property value appreciation
- Loan pay down
Rental Property Investment Affords You Time to Chase Other Goals
If you want to be a hands-off investor, the passive nature of vacation rental property management and investment gives you the time to focus on other pursuits within and outside the sector. If you prefer to always be on top of things, your investment also offers that option.
You Can Invest in Rental Property with Leverage
Rental property investment gives you the choice of starting an investment with little to no cash of your own. You can leverage a loan or existing asset to commence your investment.
Rental Property Gives You a Variety of Investment Options
This asset class gives you several investment choices. You can invest in small or large multifamily apartments, high and low-end office buildings, and several other alternatives. Investing in rental property for beginners shouldn’t be a bother as there are several options from which to choose.
Tips for Identifying Profitable Rental Property
These features can point to the profitability of a rental property. It would help if you watched out for them before making your investment.
The kind of area a property is in largely determines the type of renters it will attract. A town with a high crime rate may not have as much potential as a safe, serene area. You also have to be aware of local laws and fees that can affect rental conversions.
Number of Rental Listings and Vacancies
A neighborhood with vacancy rates on the rise may not be the ideal path to investing in rental property for beginners. A high vacancy rate may mean that people are leaving the area or a seasonal renting cycle.
Local Property Taxes
Investing in a neighborhood with a high property tax rate can affect your projected profits. You also want to find out whether a future hike in property taxes is probable.
An area’s development rate has a way of influencing rent prices. You can find out the development prospects of a potential investment site from the area. A neighborhood with much construction going on is probably good for rental investments.
The 1% Rule
The 1% rule is a general rule that rental investors use to evaluate asset potentials. For a rental investment to be viable, the rule states that the gross monthly rent must be equal to or greater than 1% of the property purchase price.
Thus, if you invest in a $250,000 property, your gross monthly income from rent should be at least $2,500. Most rental investors will not invest in a property that fails to meet this rule.
Rental Property Investment Strategies
New investors need to arm themselves with the right rental property investment strategies to make their foray into real estate profitable:
Take Advantage of Real Estate Investment Tools
Real estate investment companies and experts use software and other tools to help them invest profitably. Some of the tools include rental property finders and rental property calculators. These tools can help you locate excellent properties to invest in and also give you an idea of what to expect from your investment.
Focus on Single-family Properties
New investors should start with simple property and work their way up. Single-family rentals are the least complex type of rental investment. You only have to deal with one family, and you spend relatively little on property expenditure. That said, you can choose to branch into or spheres or rentals after you’ve gained some measure of experience.
Educate Yourself on Local Laws
You have to be aware of local laws regarding landlords and their tenants. These laws will typically specify how much rent you can charge and how often you can increase rent. Knowing these details will give you an idea of how much you can expect to make on your property.
Consult a Professional Property Manager
Learning real estate for beginners is often challenging and time-consuming. Consulting a professional property manager can simplify the process and help you avoid tenant-related issues and other rookie mistakes in the industry.
Financing Your Rental Property Investment
Let’s look at some ways to finance your new property investment:
You can invest in a new rental property by drawing on your current property using cash-out refinancing, taking a home equity loan, or using a home equity line of credit (HELOC). Most lenders will allow you to draw up to 80% of the property cost.
Seller financing happens when the property owner lends you part or all of the money for the property. You and the seller will have to agree on the terms and loan repayment details.
Banks and Online Mortgage Institutions
You can finance your rental property investment with loans from traditional lenders and online lending platforms. These loans usually come with substantial interest rates, so you want to be sure of your investment strategy before taking the loan.
You can also finance your rental property investment with the cash you’ve saved. If the property you’re investing in is financially feasible, you can also pool funds from family and close associates to get your investment up and running.
This article on investing in rental property for beginners will help newbies get their foot through the real estate door. Rental property investment is a simple way to earn passive income and hedge against inflation. However, you must ensure you get a complete understanding of the market and your investment environment before taking the plunge.