Investing is the only reliable way to build wealth over time. And if you start early enough, the compounding returns have the potential to put you in a lucrative position – even if you’re starting with almost nothing.
Most people turn to the stock market as a first investment, but rental properties could be even more valuable. The trouble is, rental property investing is intimidating to novice investors. In this guide, we’ll cover the basics of rental property investment – and how to buy your first rental property.
Table of Contents
Why Rental Properties Are So Valuable
Let’s start by explaining what makes a rental property so valuable in the first place.
· Cash flow.
For starters, a rental property can generate positive monthly cash flow. If you’re paying $1,200 on a mortgage and $200 in other expenses each month, but you’re collecting $1,700 in monthly rental income, you’re making a profit of $300 per month free and clear.
· Long-Term Gains.
If that weren’t enough, you’re also benefitting from the long-term gains of property appreciation. The right home in a solid, growing neighborhood will likely increase in value over time; in 20 years, your $100,000 home could easily become a $300,000 one. This is ideal if you’re planning to cash out when you retire.
· Minimal effort.
Managing a rental property can be stressful and time-consuming, but it doesn’t have to be. If you hire a property management company, you’ll have someone else responsible for marketing the property, screening tenants, collecting rent, issuing repairs, and even handling evictions (if necessary).
Important Tips to Follow
Of course, these benefits are contingent upon your ability to find the “right” rental property. So what should you be doing to find the perfect first property to add to your portfolio?
1. Get your personal finances in order.
Before you start, get your personal finances in order. You’ll want to make sure you have a high credit score, limited debt, and an emergency fund set aside – just in case you need it. You’ll also want to save up a down payment; you’ll usually need a minimum of 5 percent of the purchase price, but 20 percent can help you avoid private mortgage insurance (PMI).
2. Choose the right neighborhood.
Location is everything when it comes to rental property. In the right neighborhood, you’ll have no trouble attracting a quality renter. You can charge more in rent. And you’ll benefit from faster, higher property appreciation over time. Look for low-cost neighborhoods with good schools, low crime rates, and plenty of job opportunities.
3. Focus on the “bones.”
Don’t worry about the subjective look of a property as much as you worry about the “bones.” A good foundation with an ugly kitchen is fine; you can always renovate the kitchen if need be.
4. Don’t shy away from upgrades.
In line with this, don’t be afraid to make meaningful investments in the property. Spending $20,000 on quality additions and makeovers could easily help you earn $400 per month in extra rental income, helping you break even in 5 years or less.
5. Prioritize single family homes.
If you’re new to the game, consider focusing on single family homes. They don’t offer as much income stability as multi-family homes or apartment complexes, but they’re much simpler to manage and are typically easier to acquire as well. You can always expand your portfolio later.
6. Don’t overleverage yourself.
Financial leverage, or the ability to invest with borrowed money, is one of the key advantages of real estate investing. However, it’s easy to overleverage yourself. Don’t take on too much debt all at once.
7. Work with a property management company.
Working with a property manager will instantly make your life easier. They’ll take approximately 10 percent of your gross revenue, but in return, you get a practically hands-free experience. They’ll take care of everything, from rent collection to property maintenance, and even evictions (if necessary).
8. Estimate conservatively.
When budgeting your costs and expenses, plan as conservatively as possible. Prepare for the worst-case scenario and always assume that your renovations and repairs are going to cost more than what you think. It will help you avoid unexpected losses.
9. Don’t forget maintenance costs.
There are lots of little costs you’re going to face during the course of your property ownership. You’ll have to take care of little repairs, replace broken parts, and work hard to keep the property in good condition.
10. Get advice from an expert.
Finally, try to get advice from a more experienced expert. Talk to a buying agent to make sure you’re getting a good deal. Find a real estate investing mentor who can show you the ropes and help you perfect your strategy.
Buying your first rental property is going to be scary no matter how much money you’ve saved or how much you’ve prepared for the experience. But don’t worry – it gets easier. Keep an open mind, do your homework, and keep learning more. With experience, you’ll eventually become a master rental property investor.
