Investing in real estate is always an excellent way to expand your portfolio. The real estate sector offers a wide-ranging investment spectrum. Investors can buy stocks of real estate companies, invest in real estate trusts, or actively buy properties and resell for profit or give out for rent. Rental property investment is a good starting point for real estate investors. However, you must equip yourself with the right information before you start to invest.
Profitably investing in rental property is not so difficult with the right investment property strategies. However, there are several misconceptions about rental property investment risks and money-making potential, especially for beginners. In this article, you’ll learn about rental property investment strategies and how to get the best possible outcome from your investment.
Rental property investment is appealing to investors for the following reasons:
Unlike stocks and real estate trusts, a rental property gives you control over your investment. You get to decide who to rent to and how much to charge. You can decide to rent to long-term guests or short-term vacationers. You determine the direction of your investment.
An Opportunity to Expand Your Investments
One of the most straightforward real estate investing strategies for beginners is diversification. Rental property provides an opportunity to diversify your portfolio. Diversification protects you against investment risks and allows you to maximize upturns in the market.
Property Value Appreciation
Property prices are prone to fluctuation. Renting out your property gives you a choice to keep your property with the option to sell when property prices go up.
Second Home Option
Owning a rental property gives you a second home option if you suddenly can’t stay in your primary residence for one reason or the other. However, you will only be able to move into your rental property if it’s vacant and doesn’t violate the terms of agreement you may have with any tenant.
Strategies for Profitable Rental Property Investment
There are critical rental property investment strategies to help new investors take correct steps in the real estate sector.
Do your Research
The first thing you want to do before investing in a rental is to assess the property’s profitability. A property investment analysis gives you detail on cash flow potential, profit margins, and expected ROI. These parameters decide whether you’ll be profitable in the long term or not. You can perform these analyses by using an online ROI calculator.
Other criteria you may need to select the suitability of a property for rental investment include:
- Job market
- Vacancy rates/number of listings.
- Development prospects
- Susceptibility to natural disasters
Invest in Positive Cash Flow Properties
Positive cash flow properties make you more money from rent than you spend on loan repayments, maintenance costs, and associated expenses. You can use the 1% rule to determine whether a property will generate positive cash flow. Take the percentage of your monthly income from rent over the purchase price. The rule states that your rental property is viable if the number you get is up to or above 1%. However, it would help if you based your cash flow criteria on your financial targets and the amount of risk you’re willing to take.
Vet Prospective Tenants
The type of tenants you lease out your property to can make or mar your investment. Ensure you carry out financial and credit background checks on tenants before admitting them to your property. You want to give out your property only to people who will pay their rent when due. It would also help to carry out checks on their renting history. It’s better to rent out to people who are not likely to vandalize your property.
Tenants who rent your property should be responsible for the utilities they use. It is legal and common to exclude utilities from rent so that property owners can maximize profit.
Maximize Tax Breaks
Taxation laws are typically favorable to rental property owners. Tax deductions on your property can help you maximize income. Even tax benefits that seem minor can accrue into something significant over time.
How to Finance Rental Property Investment?
Now that you’ve found an investment property let’s look at how you can fund your next investment.
Seller financing allows you to borrow from the owner of the property you intend to buy. You drop an agreed sum as a down payment with a promise to make a monthly payment till the loan is finished, the same way you’ll do with a traditional lender. The terms of this agreement must be documented and may involve a third party. You can bring in agents, lawyers, or escrow to observe and certify the contract.
You can secure funding for rental property investment by using the equity on your current home. A home equity line of credit (HELOC) lets you use your property as security for a loan that you will service monthly with interest-only payments.
Traditional Lending Institutions
Banks and other lenders can provide a mortgage loan, usually at higher interest rates. You can consider this option if your research shows that your profit margin will cover the debt in the long run. Online mortgage lenders can also provide funding for your rental property investment.
New investors who have a healthy amount of cash saved up can pay outright for a property or pull resources with family and friends to invest in a rental.
Drawbacks to Rental Property Investment for Beginners?
Every real estate investment comes with a measure of risk. You should be aware of potential pitfalls that come with rental property investments:
- Maintenance costs can rise with time.
- Neighborhoods can decline in value.
- Unforeseen expenses.
- Risk of having bad tenants.
- Low liquidity.
- Property may be vacant in between leases.
Investing in rental property can be an excellent way to growing your wealth. But you should know what you’re doing. It would be best if you equip yourself with rental property investment strategies suited to your target area. You have to perform due diligence on markets, tenants, and properties. You should also be aware of the potential drawbacks and devise insurance mechanisms to protect your investment.