Ever wanted to start investing in rental property but not sure where to start? This comprehensive guide for beginners will walk you through the process.
Investing in rental properties is a great starting point for real estate investors. Rental properties can provide cash flow and generate value from appreciation. Investors also get tax incentives and deductions from owning real estate.
While it can be a lucrative method of real estate investing, there's a lot to know before investing in rental properties. This comprehensive guide will show you how to start investing in rental properties as a beginner. We'll go over what it takes to invest in rental properties, common mistakes to avoid, and things to know before you buy your first rental.
What is a rental property?
A rental property is a residential or commercial property that's leased or rented to a tenant over a set period. There are short-term rentals, like vacation rentals, and long-term ones, like those under a one-to-three-year lease.
Residential rental properties are one- to four-family homes, which include:
single-family homes,
duplexes,
townhouses, and
triplexes.
Types of commercial rental properties include:
multifamily (apartment complexes),
industrial (such as a warehouse or self-storage),
office space,
retail space, and
multi-use.
Residential rental properties are often more accessible to beginners because they're less expensive. Less money is required upfront and that often means that it's easier to get financing. While there are exceptions, residential rental properties are also typically easier to manage. In most cases, managing one tenant is easier than managing twenty.
For these reasons, this comprehensive guide to investing in rental properties is focused on residential rentals.
Most investors buy a rental property with the goal of producing positive cash flow -- earning more income each month than they spend on expenses. Not every rental has a positive cash flow at first but building up to one is a common goal of rental investing.
Owning a rental property is an active form of real estate investing and requires time, dedication, and involvement. Being a landlord isn't for everyone. As you'll see, there's much work involved in identifying, analysing, buying, and managing a quality rental property.
While there are options for outsourcing some of these active tasks, it's rarely 100% passive, and there are always risks. That's why it is a clever idea to get a professional property manager like Rent Square on your side to guide you through the potential pitfalls.
Do you think investing in a rental property might be a promising idea for you? Keep reading to find out where to start and how to best prepare yourself for the project at hand.
Let's look at the seven steps you'll need to take to invest in rental property:
1. Determine where you want to invest
Beginning real estate investors often want to purchase rental properties in their backyard. That could mean in the same postal code as their current residence, the same city, or the same state. However, this may not be an option depending on the market you live in, nor is it always the best choice.
If you live in a neighbourhood where property values are on the upper end of the market, rent may not support a positive cash-flowing rental property.
Maybe you live in an expensive market like Auckland, where the average single-family property was over $1.2 million already. You might not have the funds available to buy a rental property nearby. If that's the case, look in other markets for your first investment.
While it may be easier to manage a rental that's only 10 minutes from your home instead of two states away, you can invest in any market. If you're not going to invest in your backyard, take a high-level view at other markets, looking for areas that meet these criteria:
The demand for rental properties is high - housing supply and vacancy rates are low.
Job growth is stable or growing. Economic expansion, job growth, and population growth are good indicators.
The average rental income supports the purchase price of the rental property and aligns with the funds you have available to invest.
Get a free Rental Appraisal from Rent Square to determine if a property that you are planning to buy will be suitable.
Rent Square will consider things like:
Supply and demand for housing, including any future development that will increase demand.
Crime rate.
School ratings.
Average property value.
Average rent.
Determine what you want to invest in
While single-family rental properties are one avenue of investing, they're not the only option. You could own a duplex, triplex, quadplex, or something even larger (if you're interested in commercial rentals).
No matter what property type you choose, it’s essential to know what qualities of that property type are in demand. This includes the size of the unit or home, the number of bedrooms and bathrooms, or amenities such as a pool or fireplace.
Find out if there's an oversaturation or undersupply of a specific property type. You might find, for example, that an area has too many one-bedrooms and few two-bedrooms available for rent. You can do this by looking at the current inventory on the market in that area. Talking to a Rent Square property manager is another great way to get information on a specific market.
Make sure you know what you're looking for in a rental property, including:
square meters,
number of bedrooms or bathrooms,
type of building (e.g., wood or concrete),
type of parking available, and
property type (e.g., single-family residence, condo, townhouse, duplex, triplex, or fourplex).
It’s common to have different sets of criteria for different neighborhoods.
3. Find potential rental properties to invest in
Once you’ve narrowed down your market and know your criteria, you can search for properties to invest in. There are several ways to find investment properties.
The most common way to identify potential investment properties is by searching websites like:
You can also reach out to a real estate investment agent in the area and ask them to set up those same alerts. A quality realtor can be an excellent source for connections to banks, lending institutions, contractors, or suppliers that will come in handy when buying a rental property.
4. Analyze the rental property and run the numbers
Figuring out the net cash flow for a rental property is crucial. This is the rental income minus expenses and mortgage payments. This is especially important if your goal is to have positive cash flow (which it almost certainly is).
To do this, first determine what you'll be able to collect in rental income. The best way is to get a full Rental Appraisal from Rent Square.
Next, identify all costs that may be associated with the property, which can include:
taxes,
property insurance (flood insurance may also be required),
water and sewer,
garbage,
electric,
gas,
homeowners' association (HOA) fees,
advertising,
maintenance (the industry standard is 1%–3% of the property value),
lawn care, and
property management. For trendsetting fees in the New Zealand market go to Rent Square.
5. Get financing (if needed)
If you can't buy the whole property in cash, you'll need financing. Start the paperwork and underwriting process as soon as possible once you've identified an investment. Not every bank lends to individuals for investment properties -- identify a lender or bank that you can work with before the property is under contract.
Most banks require 20% deposit but putting more down often means a better interest rate. Interest rates generally are higher on investment property loans and can vary depending on the type of property you're buying.
6. Choose a property manager to manage the property
If the goal of the rental property is to create passive income, hiring a property management company will likely be best. They handle everything involved with managing the rental in exchange for monthly payments.
Each management company has a different structure for their fees and services, which could be a flat rate or a percentage of the gross rents. You'll often pay 8%–12% of your rents. Rent Square is exceptional and charges only 7% - for a full service including:
showing your property to potential tenants
screening new tenants;
handling leases and move-ins;
coordinating tenant maintenance requests;
communicating with tenants;
collecting rent weekly;
sending notices, including late payment and eviction notices;
move-out inspections;
move-in inspections;
four-monthly inspections; and
disbursement of any deposit fees after move-out.
The only additional costs are for:
listing your property on several websites
a flat rate letting fee
Why don't you contact Rent Square today to have professional and friendly discussion about your rental investment journey?
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