If you've ever sat down and asked yourself "should I invest in rental properties?" you probably already know that owning rentals is a great way to build your wealth and generate cash flow. The hardest part about real estate investing, though, is taking your first steps and acquiring your first property.
Here's a good start on what you should know about getting started with real estate rentals as a form of investment.
Although individual complexities come up with each unique property, the basic concept of investing in rental properties is fairly simple. The goal of rental investing is to build a portfolio of properties that produce a positive cash flow, meaning that they generate a profit after their mortgage, insurance, maintenance and other expenses have been paid.
The more properties you have that successfully generate positive cash flow, the more income you can expect to receive from your portfolio each month.
For most new real estate investors, buying a single family rental will be the best place to get started. Single family rentals have the advantage of being relatively inexpensive compared to multi-family and commercial properties, making them much more accessible to the beginner with a tight budget. A single family rental is also easier to manage, maintain and rent out than a larger property.
When it comes to investing in rental properties, scaling up over time is the key to producing large, recurring passive income with single family rentals. Although there are exceptions, very few individual properties have the capacity to provide you with a livable income on their own.
As you acquire more properties, though, you'll start seeing larger and larger amounts of income each month. Needless to say, the level of positive cash flow from your properties will increase considerably once they are paid off and you no longer have to deal with a mortgage payment.
If you're just starting out as a real estate investor, buying your first rental should be your primary focus. Finding a suitable property can be done in several different ways, but one of the best is simply to check your local classifieds and real estate listings to get an idea of what is on the market.
Be sure to use sites like the MLS, Renters Warehouse, Zillow, and Craigslist that will show you potential single family rentals that are for sale.
If you're looking for FSBO deals, keep in mind that they don't show up on major realty sites, but they often turn out to be good rentals. Foreclosed properties are also worth looking into, since they can sometimes prove to be the best deals from a price perspective.
While you're looking, you need to be considering the best places to invest in real estate in your city. As a rule, the best place to invest in real estate is a neighborhood close to both business districts and local amenities. If you have a local college or university in your area, the neighborhoods around it can also be good places to invest in rental properties.
When you're trying to find the best place to invest in real estate, you need to think like a renter. Consider what you would want to be close to and what kind of neighborhood you would want to live in if you were renting a property, then find areas that match most of your criteria.
Once you've found a property that seems like it has good potential, it's time to start crunching numbers. You'll need to figure out how you're going to finance the property and what the cost of the financing will be, then add in insurance costs, estimated maintenance and any other expenses that will be involved in buying it.
Once you have a good idea of monthly costs, determine what you can rent the property out for by looking at similar rentals in the same area. If the property won't produce a positive cash flow once the expenses are subtracted from the rental income, you should look at other properties. Don't rush through this step, as due diligence is key to successfully investing in rental properties.
If you have found a property that you can afford and which will produce a reasonable amount of positive cash flow, the next step is actually buying it.
Most new real estate investors choose to finance their first properties with traditional mortgages. If you're buying directly from the previous homeowner, you may also be able to secure an owner financing deal in which you pay the owner over time for the property, rather than borrowing the money from a bank. Though there are other forms of financing, such as hard money loans and partnership deals, these are usually used by investors with a little more experience.
If you don't choose to start with a single family rental, you may be able to use a variant of standard mortgage financing called house hacking to buy a multi-family property.
In a house hack, you'll finance the property with a mortgage, occupy one unit of it yourself and then rent the remaining units out. House hacking is a good way for younger investors without families or homes of their own to buy property, pay it off with the income they receive from it and make a bit of additional money in the process. For people who are more established, though, house hacking usually isn't as appealing.
One question many beginners have about investing in rental properties is whether or not they can buy, fix and rent out distressed properties successfully.
Though homes that need work get more attention on the fix-and-flip side of the real estate investment business, they can also make decent rentals. As with all things in real estate, though, it's down to the numbers on the specific property you're looking at. If you can save money by buying a property cheaply, making some repairs and then renting out for more positive cash flow than it would yield otherwise, it may be a good deal. If the property is in the wrong area or would require too much money to fix to make it worthwhile, though, it probably isn't worth further consideration.
Investing in rental properties is among the best ways to achieve financial freedom and build your wealth. If you've ever asked yourself "Should I invest in real estate?", the answer is most likely a resounding yes!
If you're willing to go to the work of finding the best places to invest in real estate in your city, looking at properties, crunching numbers and taking on the financial obligations involved in real estate investing, there's a good chance that you can be a successful investor.