certainly risks as the real estate market fluctuates, the reality is that people will always need a place to live. Moreover, unlike the stock market, you have a great deal of control over your investment. However, rental properties do not come without risk. There are plenty of factors to consider before making this kind of investment, and it goes beyond the initial upfront costs.
Whether you’re thinking of making your first move buying a rental property or are considering acquiring a second or third residential home, there are some key things you need to consider first.
1. Know the Exact Numbers for a Profit
Many inexperienced real estate investors buy into the naïve dreams of grandeur that are associated with owning rental properties. While it is possible to attain a large amount of wealth through these investments, the truth is that it often takes years before a rental property actually becomes profitable. Purchasing a rental property typically comes with the first initial down payment, property taxes, and a list of repair costs that are needed before tenants can move in.
So, before you decide to buy, know the exact margins that will make the investment property profitable.
Be sure you figure out the exact answers to questions like:
- What is the highest price you could pay for the property and repairs without going over your budget?
- What is the going rental rate in that neighborhood for comparable properties (those of the same size and design)?
- How long will it take to turn a profit if you are able to charge the market rental rate to cover your costs and make up your initial upfront expenses?
- What are the expected additional costs that will be needed to spruce up the rental property and increase the home’s value?
You will need to know the answers to these questions before you can even begin to consider an investment purchase. There are plenty of online calculators and resources to help you determine these costs, such as the rental property calculator and the excel spreadsheet template for rental property analysis.
2. Decide How Involved You Want to Be
The term “rental property owner” or “real estate investor” sounds much more glamorous than the term “landlord.” But, essentially, if you have tenants in a property that you are renting out, that is what you are. The good news is that your level of involvement as the property owner is flexible.
Take the story of Evelyn J., who lives in New York. She decided to purchase some rental properties in the booming Denver, Colorado area. She found two rental homes that seemed to be a great investment in Denver, but did not want to personally make the move there to manage the properties. She reached out to a residential property management team in Denver to manage the process of not only finding and vetting tenants, but also handling common maintenance requests, filling vacancies, and other common issues. According to Evelyn, using a property management company “has been excellent for me as an absentee landlord… I find that they know the pulse of the tenant relationships.”
On the other hand, perhaps you would prefer to keep a close watch on every step of the process. In this case, you may want to use a property management software system that keeps you organized and makes it easy to communicate with tenants. Platforms like 123Landlord and TenantCloud offer programs that can be used by both the property manager and the tenants to handle everything from online applications and tenant screening to paying rent and submitting repair requests.
3. Find a Team that You Can Trust
Owning a rental property is by no means a one-person job. Every step of the way will require assistance from other knowledgeable people – from real estate agents to mortgage brokers to house painters.
Making an unwise partnership decision can lead to disaster and quickly eat into your profits. For instance, one of the main reasons that real estate investments turn south is due to unexpected repair costs. And unless your investment property is in tip-top shape, chances are that some level of repairs will be necessary before tenants can move in. While you may consider yourself somewhat handy, there are plenty of home improvements that need to be left to the professionals. If major renovations are needed, such as roofing, plumbing, or structural repairs, you will want to find a contractor who is able to give you reasonable estimates as well.
If you don’t have any connections like this already, it is wise to reach out to other real estate investors and ask for recommendations. Many cities and communities will host regular real estate investment meetups (also known as REIA meetings) where you can network with other investors and learn about trustworthy businesses that work with contractors that offer these kinds of services.
Real estate investment can certainly be a smart financial move, but only if you are prepared for what’s ahead.
Be sure that you know your numbers forwards and backwards and exactly what you need to turn a profit. From there, be sure that you are able to handle the day-to-day work that comes with being a landlord and consider some options that would work best for you. Finally, know that you are not alone. There are plenty of resources out there to help you along the way, and it is best that you build a team that you can rely on to help you.