How To Start Investing In Rental Property

Real estate is an awesome investment. It is adaptable to your goals, and your pool of resources. The benefits of owning rental properties are as vast as your goals and desires. Don’t let analysis paralysis or the fear of failure stop you from getting started!

You will make tons of mistakes, trust me I did!! Still, I am so thankful for our Real Estate investments. Most importantly, I’m glad I started.

HOW TO START INVESTING IN SINGLE FAMILY HOMES

Real Estate comes in many forms – multi-family, shopping centers, storage Units, industrial office buildings, residential housing – all of which come with different sizes and price tags.

There are lots of financing and management strategies. This unique melting pot of options means that anyone can gets started with a little bit of wisdom and a lot of out of the box thinking no matter their financial planning.

For this guide we are going to focus on residential single family homes and how to buy rental property in this category.

While we’re focusing on single family homes, with some minor adjustments, this plan could work for many other types of rental property.

The key is to have a model that works, and to use that model to guide your plan. A great plan allows you to get to your goal with minimal mistakes.

Here are 10 things to evaluate before you buy your first income property:

1. TYPE OF PROPERTY

While there are tons of property types; we are going to focus on single family. Even within this niche you can get started with a personal property meaning you live in it first and rent it out when you move OR you can buy a rental property. This means that it is a rental property from day one.

In this day and age, its also easier than ever to invest in other types of real estate asset classes as a passive investor via real estate crowdfunding.

While investing in commercial real estate via REITs (Real estate investment trusts) has always been an option available to investors, online platforms like Fundrise have cut out unnecessary middlemen and drastically reduced fees (by as much as 90%), resulting in higher returns for small time investors.

With as little as $1,000, you can invest in commercial real estate projects via Fundrise. If you’re interested, you can find out more here.

2. LOCAL OR LONG DISTANCE

Being a local investor allows you to be able to check on your properties easily if there is ever an emergency. It also makes it easier to self-manage or supervise a property manager.

Long distance allows you to invest where the market make the most sense for cashflow; not just your local market (i.e. Kentucky versus New York City). You can live and work in California and invest in the Midwest where your money goes a lot further with higher returns.

There is also a 3rd option if you want to invest in real estate outside your market and want a truly passive option, which is to invest via an eREIT.

This method offers less control and doesn’t let you add value through sweat equity, but its truly passive and lets you get started with as little as $1,000. You can choose to invest on the West Coast, the Heartland, the East Coast, or choose an eREIT with a mix of properties across the country – and it is 100% passive.

At the moment, the Fundrise Income eREIT is returning 10.5% in dividends (though of course, past performance is not an indicator of future returns). You can learn more about investing with Fundrise here, or you can learn more about the platform in our Fundrise Review.

3. APPRECIATING MARKET OR CASH FLOW ONLY

Some markets such as California, DC, or New York City, see large amounts of appreciation that a landlord can anticipate.

Other areas such as small-town Texas, Wisconsin or upstate New York are cheaper and return large cash returns but the house will never go up in value. When you sell the house it will be worth the same amount you paid for it.

4. SELF MANAGEMENT OR PROPERTY MANAGEMENT

As a self-managing landlord who has 3 houses across the country from her location, I am proof it is possible to self manage from afar.

While it has had a lot of headaches and moments, the savings of one month’s rent, 10% monthly fee along with no middle manager ie rental property management has made it worth it.

On the other hand, I am doing the follow up before and after a big storm. I do try to fly out to do the changeover to new tenants.

If you do not want to do the day to day management, you would need to hire a property manager. In this case your key to success is to find a trusted team member.

You need to be able to trust their judgment on choice of contractors and trust how they handle tenant matters. They are going to be your day to day person on the front who represents not only you but also your money.

And as we mentioned earlier in this article, if you want to invest in real estate but don’t want to be a self-managing landlord and are wary of outsourcing to a property manager, you can also look into investing in real estate via crowdfunding or eREIT.

5. PROPERTY DEMOGRAPHIC

The key when buying rental property is to make sure your demographics all match up. You want your proposed rent to match up to your demographic along with your area.

For example, an awful school district is is not going to appeal to the “young family with kids” group. Just like a great school neighborhood is not going to appeal to 4 single dudes who are looking for a party crash pad. So it is important that your house, demographics, and price point all match up.

6. CASH OR FINANCING

Under today’s financing you can put 20% down on rentals when you own less than 4 and 25% down when you own more than 4.

While paying cash is great because you are debt free; if you finance the rentals you are either able to buy a bigger property or more of them as your financing dollar goes further. You are also able to take advantage of the low interest rates of today.

Leverage can be an asset or a liability. Leveraging your property means that you can buy more property with less capital, it can also mean you have risk.

For the purpose of illustrating lets pretend you have $100,000 to invest in Real Estate. For ease of numbers lets assume you have no other variable except the ones listed all the houses are all exactly the same on condition, location, etc.

s always with rewards there is a lot of risk. More houses means more tenants, more expenses, more change for vacancy, etc.

7. LOCATION (SCHOOLS, NEIGHBORHOODS, HOUSE SIZE)

The key to a great successful rental is one that rents quickly in a great area and attracts tenants that pay their rent on time. Over the years we have found that there are a few characteristics that help us narrow down these types of properties:

7.1. Great Schools – Schools have been the key. We tend to buy in the second best elementary school district. High Schools are too large of an area and people tend to have younger children. Middle school at 3 years is too short of a time. Elementary schools, for us, are golden.

Elementary schools are from Kindergarten to fifth or sixth grade. That’s at least 6 years in one location. So we buy in an awesome elementary school even if the other higher up schools aren’t as great.

A lot of people will have moved on by the time the child is out of school, yet they like not having to move by the time the kid needs to enter school. Here are four great places to look for school ratings:

7.2. Great Neighborhood – I typically look for the worst house in the best neighborhood. I have a lot of people who are perfectly fine with my starter house because location is what is important to them. They want that neighborhood.

7.3. Smaller/Cheaper Houses – Rental Values due to not increase in correlation to the size or price of house. In my experience smaller house will rent per square foot more than a larger house. Our smaller houses rent easier, and quicker than the larger ones. Therefore larger does not necessarily mean better returns. For our markets and us are smaller houses have the best returns.

7.4. Not Overly Updated – You want the house nice but you will not get extra rent because your house has a backsplash in the kitchen or upgraded cabinetry/carpeting, customized closets etc. You want clean and nice but save your money. Things will just break and you won’t get your money back.

7.5. Culdersac/Quiet Street /Fenced in Backyard – If you are appealing to those with animals or kids this is very important. All of our houses that are not in a HOA have fenced in backyards. It has been a great asset in attracting those tenants.

8. BUDGETING FOR MAINTENANCE

You must always verify your numbers. In my experience expenses are always greatly underestimated and income over estimated. Always triple check every number and base your decision on conservative not liberal numbers.

As with any other business or endeavor when it rains its pours. So you must always be prepared for the unexpected. On one of our rentals we had no repair expenses for almost 2 years. Than in a 3 months span we have spent $4,000 on a new bathroom and 3,500 on a new AC system.

So always be prepared especially when things are going great. It will make the tough times more tolerable and less stressful.

We buy newer homes or homes that we have already completely renovated in order to keep the renovation budget down. Still, no matter what the house we buy, we do a thorough inspection and have an idea of what it needs.

For example, even our newer homes after 7 years needs a new AC unit. The builder grade units are simply not meant for more than 7 years.

9. BUY A HOUSE THAT IS RENTAL FLOW POSITIVE FROM DAY ONE

The key to a successful rental is one that cash flows from the day it enters service. In order to do so, one must buy a house where mortgage and HOA expenses are less than their rental income.

For more about the numbers you need to understand when buying a rental property, here are 5 crucial numbers that can make or break your real estate investment.

10. EXIT PLAN

You should always know your exit plan. Are you planning on keeping the house for 20 years until you are eligible for retirement? Do you want to just keep the home till the next boom, sell paid capital gains and depreciation and then buy in the bust? What is your plan and goal for your homes?