If you’re looking for a way to put your money to good use and generate additional monthly income, a rental property could be an appealing option. But before you dive in, you should know a few essentials.
Let’s explore some of the top rental property investment tips for beginners.
- Be Prepared to Fork Over Cash
Money may be cheap right now, but that doesn’t mean you can just waltz into a real estate investment deal. If you’re a first-time investor, you have to be prepared to fork over some serious cash to get started.
Not only are the interest rates going to be slightly higher for an investment property, but you’ll be expected to meet a particular down-payment threshold. Because mortgage insurance isn’t typically available for rental properties, you’ll need a minimum of a 20 percent down payment.
You’ll also have to cover closing costs above that. Thus, on a $200,000 rental property, don’t be surprised if you have to bring more than $50,000 to the closing table. Every situation is different, but that would be a fairly reasonable figure.
- Know What Makes a Good Rental Property
Just because you think you’ve found a house that looks like a rental property, this doesn’t mean it will make a wise investment. You can’t look at a prospective rental the way you would a primary residence. They have their own criteria.
For starters, consider:
- Does the neighborhood have other rental properties nearby? Are there amenities, schools, and other resources in the area that will support a demand for housing in the future?
- What is the property tax rate in the area? How much will you have to fork over each year?
- What is the average rent in the area?
- How many bedrooms does the prospective site have? Is there a way to easily and cost-effectively convert an existing room into an additional bedroom so you could charge more for rent?
These are just a few of the details to weigh. It’s up to you to look at a rental property from all angles. Only then can you feel confident that it should be a good investment.
- Know Your Numbers
Part of the due diligence process for rental properties involves running appropriate numbers. In fact, you could argue that nothing else matters more than the numbers. Specifically, you have to think about potential cash flow.
It’s not enough to calculate the rental income and mortgage expenses. You also have to weigh the cost of property management services, property taxes, rental property insurance, utilities, maintenance and repairs, vacancies, advertising, and other expenses.
Though you should always run the numbers for a property, for a swift judgment about whether a property could make a good investment, you could use the One Percent Rule. For this calculation, multiply the purchase price of the property by one percent. This renders a base level of the monthly rent you might well need to be profitable.
Investopedia gives the example of an investor who is looking to obtain a $200,000 mortgage on a rental property. Using the one percent rule, the baseline rent would be $2,000. So the investor would need to charge $2,000 for rent, assuming all the other expenses come in below this threshold.
- Build a Small Team
It’s possible to operate as a solo real estate investor and do all the work on your own, but that’s likely to be time-consuming and stressful. You’ll also be compelled to do things that don’t fall within your skillset, which could lead to low-quality results.
The better option is to surround yourself with a small team of experts. This may include a property management service, real estate agent, banker, and handyman.
- Learn As Much as Possible
Your first investment property probably won’t be your last. Treat each moment as a lesson and commit yourself to learn as much as you possibly can.
Both your successes and failures will teach you a lot. Soak up these lessons and apply them to your next deal.
Is Real Estate Investing Right for You?
Real estate investing can be a lucrative and rewarding endeavour, but it’s not destined to meet everyone’s needs. Some people have the personality and discipline to excel at the effort, while others will find it stressful and unpleasant.
Before making the decision to invest in real estate, spend some time researching the pros and cons and considering how a rental property would fit into your lifestyle. Only then may you make the decision to give it a go.