Being a new real estate investor can be daunting. However, if you know how to find your first rental property, you’re off to a good start.
Table of Contents
- Is Rental Property a Good Investment?
- Complete Guide on How to Find Your First Rental Property
- Common Mistakes to Avoid as a First-Time Real Estate Investor
- Invest in Your First Rental Confidently
Rental properties are one of the most lucrative investment vehicles, providing generous returns to many rental property owners. Since it’s possible for investors to hire a third-party manager, rental properties can be a good source of passive income. However, many new real estate investors are hesitant to venture into this kind of investment.
One of the reasons why new investors find it daunting to invest in rental properties is that they don’t know how to get started. Learning how to find your first rental property that will generate income can be challenging. As a new rental property investor, your lack of experience might leave you feeling unsure of how to proceed.
In reality, however, buying rental property is a fairly simple process once you get a basic idea of what to look for. Learning how to find your first rental property in a few simple steps can help you get started with your investment. Fortunately, there are online property listing databases available to make the process easier, like Mashvisor’s Property Finder feature.
In this article, you will learn:
- That a rental property is a good source of income amid the inflation
- That rental property investing comes with risks and rewards
- How to find the best rental property depending on your preferred real estate strategy
- How to avoid the common investing mistakes that can affect your overall profitability
Is Rental Property a Good Investment?
A rental property is one of the biggest assets you can buy. Whether you’re a seasoned investor or just getting started with real estate investing, buying a rental property is an excellent investment strategy. Many real estate investors are starting to venture into rental properties because of the good earning opportunity from this type of investment.
Amid the pandemic that started in 2020, many housing markets in the US have experienced a high demand for real estate property. However, inventory has remained scarce. It is because in some markets, especially in tax-friendly cities, massive migration has been driving population growth. The migration has resulted in an increase in property demand.
The rising demand for housing come from both homebuyers and real estate investors. Due to the growing population, many people consider it an excellent opportunity to start investing in real estate. Experienced investors also find the rising real estate demand as a good chance to grow their portfolio and start investing in rental properties.
Why Invest in Rental Property
Despite the global crisis brought by the COVID-19 pandemic, the past couple of years has been generally good for the U.S. real estate market—at least for most sellers and investors. Demand has been high, supply has been declining, and property values have been appreciating at a steady pace.
Due to intense competition, many residents are having difficulty finding a property they can afford to buy. It is why the demand for rentals is also rising continuously, opening more doors to new investors who are looking to venture into rental properties.
Here are three reasons why you should also consider investing in a rental property:
1. Protection Against Inflation
With the different crises that are happening globally, high inflation rates are becoming inevitable. If you’re wondering how to protect your investments against inflation, investing in real estate is one of the answers. Real asset investments, such as rental properties, are a highly leveraged type of investment against inflation.
When investing in real estate assets, you can expect your investment to appreciate in value over time—with or without a crisis. Housing rates are appreciating steadily, especially in big and fast-growing cities. Since the inflation rate is expected to rise significantly in 2022, now is the perfect time to be a landlord.
2. Increasing Demand for Rentals
With the increasing property prices, many people won’t be able to afford a home to buy. As a result, most of them will be forced to rent instead. It will create more demand for rentals, which will open more doors of opportunities for rental property owners. After all, crisis or not, people will still need a house to live in.
It is another reason why investing in a rental property amid the high inflation is a good idea. While other businesses are suffering, rental property owners can still expect to keep their business going—primarily because housing is one of our major necessities. Your asset will grow in value over time, protected against inflation, while earning rental income despite the crisis.
3. Diversification of Investments and Passive Income
Buying a rental property allows you to diversify your investment portfolio. If you’ve already invested in stocks, bonds, and other investment vehicles, adding real estate to your portfolio is an efficient way to mitigate risk. It can also help you benefit from unavoidable market swings because, as mentioned, residential properties are a necessity.
Further, investing in a rental property can also give you an opportunity to earn passive income. By owning a rental property, you can earn recurring monthly income from rentals with relatively little effort to operate the business. Rental property investments are an excellent way to make regular money on the side, which is even better than earning dividends from your stocks.
Risks of Investing in Rental Property
All types of investments can be rewarding when done correctly; however, they also come with certain risks. The same goes the same with real estate investing. Whether you’re a new or seasoned investor, it’s important to be aware of the different risks associated with real estate investing. Knowing and understanding the risks can help you know how to avoid or minimize them.
Real estate investors who are planning to invest in rental properties in 2022 should be cautious when choosing an investment property. After all, not all income properties are created equal. While some properties can be a good source of passive income, others may not generate sufficient cash flow to cover the costs of owning a property.
Here are the three most common risks many rental property owners experience:
1. Wrong Location
Location is one of the most important factors that you need to consider when investing in real estate. No matter how good your investment plan is, if you invest in a bad location, you are setting yourself up for a disaster. It is why it’s crucial to choose your location carefully and do thorough research to ensure that you’re buying a property in a progressive city.
The best locations for rental investments are those with strong economic conditions and steady population growth and offer a variety of job opportunities. Such factors can affect the demand for rentals. You should also consider the home appreciation rates to ensure that the value of your property will grow exponentially over time.
2. Low Occupancy Rate
Another common risk of investing in rentals is the risk of vacancy. If you invest in a location where the demand for rentals is slow, you’re likely to encounter problems with your occupancy rate. Also, if you fail to add value to your property to make it more attractive to tenants, you’ll find it difficult to get your rental home occupied.
Knowing how to avoid high vacancy rates is critical to your success as a landlord. Make sure to invest in a location with a high demand for rentals. Also, make the necessary property improvements to ensure it can attract tenants. Of course, you also need to know how to market your home well and serve your tenants properly to increase the tenant retention rate.
3. Bad Tenants
While your goal is to get your property occupied, it’s equally essential to learn how to screen your tenants thoroughly. Bad tenants are a few of the reasons why many rental property owners fail in their investments. Bad tenants do not pay on time, cause deliberate damage to the property, and create problems with the neighbors and other renters.
You must know how to completely avoid bad tenants to lessen your problems as a landlord. One way to ensure that your property is occupied by quality tenants is to know how to price it correctly. It’s also advisable to draft a comprehensive lease agreement based on the landlord-tenant law in your chosen location.
Complete Guide on How to Find Your First Rental Property
Searching for investment properties is a critical part of real estate investing. In fact, knowing how to identify positive cash flow properties is what differentiates a successful investor from an unsuccessful one. With this in mind, beginners need to be especially careful and conservative when approaching the housing market.
Here is a helpful yet simple guide to help you find your first rental property:
1. Set Your Objectives
Before starting the process of finding your first investment property, you need to set clear objectives. Some of the parameters that you need to address include the following:
- Maximum down payment: The maximum amount that you’re willing to put towards a downpayment is an important factor to consider before buying your first rental home. Most lenders will require a down payment, which can eat up a huge chunk of your budget. Deciding how much you’re willing to make as a downpayment can help you find the right property that fits your budget.
- Property type: The type of property you want to invest in is another critical factor that can help you set your objectives. Do you plan to invest in a single family home, multifamily house, condo unit, or apartment building? Also, you need to decide the type of tenants you plan to market. Do you want to serve families with kids, retirees, or young professionals?
- Return on investment (ROI): You should also take into account your optimal return on investment. How much monthly returns do you need to cover the costs of operating a rental property, including the mortgage? How long will it take for you to see a return on investment? It is a crucial parameter that will identify which investment property is considered profitable.
- Rental strategy: The rental strategy you are going to implement (Airbnb vs traditional renting) is another essential metric that will help you find the right investment property. Some rental properties are best used as vacation rentals, while others are optimal for traditional renting.
Setting objectives will help get your first rental property search on the right track. Additionally, understanding your objectives will help you learn how to manage your real estate investments in a focused manner.
2. Identify a Profitable Real Estate Market
It goes without saying that identifying a profitable real estate market is a critical part of finding your first investment property. As you would expect, there is a myriad of variables that you need to take into consideration when looking for the best rental investment markets.
But to keep things simple for you, here are the main factors that you should focus on:
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- Strong economy: A real estate market with strong economic conditions is one of the best markets for rental property investing. A robust economy means a higher employment rate and better living conditions. With a strong economy, you can expect the population to grow, and so the demand for housing will also increase.
- Low unemployment rate: A city’s employment rate is crucial to the profitability of a housing market. An area with a healthy employment rate will invariably see a strong rental market as demand for housing is consistently strong.
- Population growth: A decent population growth rate is another indicator of a strong rental market. Generally speaking, a growing population bodes well for real estate investors as it ensures the long-term viability of their investment.
- Affordability: The ideal real estate market for your first rental property should be an affordable one. Unlike expensive areas, a market with affordable housing offers more opportunities for real estate investors and provides more room to experiment with different strategies.
- Appreciation Rates: Even though we prioritize affordable housing, we should not take for granted the importance of a steady appreciation rate. In a good real estate market, your real estate assets will increase in value over time. It is one of the reasons why investors are putting money in real estate—they want their properties to grow in value after a few years.
3. Use Specialized Real Estate Investment Tools
Savvy real estate investors know how to find rental properties efficiently, and one of the best ways is to use high-end specialized tools. Relying on such solutions takes potential human errors out of the equation and ensures more accurate results. Fortunately, there are real estate analytics websites, like Mashvisor, that can provide all the tools you need.
Here is a brief overview of how you can use Mashvisor real estate investment software to find your first rental property:
Real Estate Heatmap
The Real Estate Heatmap uses visual cues and neighborhood data and enables you to locate the top-performing areas on a map. Whether you are looking for your first Airbnb rental property or a long-term rental, the tool is a great way to narrow the scope of your search.
Property Finder
The Property Finder is one of the most powerful real estate investment tools on the market today. Thanks to a set of machine learning algorithms and cutting-edge AI technology, the tool is able to sift through thousands of listings. It helps you find a high-return investment rental property that matches your criteria.
With the Property Finder, you can easily search for income properties based on your preference. To start, you only need to input the neighborhood or city of your choice. You can also set certain parameters, such as your budget, property type, number of bedrooms/bathrooms, and rental income.
Investment Property Calculator
Mashvisor’s Investment Property Calculator helps you determine a wide range of property metrics that pertain to income and expenses. The tool allows you to find a positive cash flow rental property in no time. You can also customize your expenses, as well as your financing options, to get accurate results based on your personal preference.
Also, with Mashvisor’s rental property calculator, you will be able to calculate an investment property’s potential income, cash on cash return, cap rate, and cash flow. You don’t need to learn how to do the calculations manually and find the data yourself because everything will be provided automatically.
Related: How Much Profit Should You Make on Your First Rental Property?
To start looking for and analyzing the best rental investment properties in your city and neighborhood of choice, click here.
Exploring Other Ways of Finding a Rental Property
You will find the best rental property if you use online search tools. However, there are other strategies that a beginner real estate investor can implement when trying to find properties for sale.
Here are a few examples:
1. Retain the Services of a Real Estate Agent
Working with a real estate agent is another great way to find your first rental property. In fact, agents are able to access a large database of listings and are well-positioned to identify an investment property that fits your requirements.
Moreover, a real estate agent can help you avoid the common pitfalls that are associated with real estate investing. Examples include failing to explore all financing options, not accounting for expenses, and setting unrealistic goals.
Related: Working with a Real Estate Agent: What Investors Should Expect
2. Drive Around Your Area
When you are trying to figure out how to find rental properties, driving for dollars is an option worth considering. In fact, this strategy’s proven to be particularly effective when it comes to unearthing undervalued real estate investments.
The idea behind the driving-for-dollars approach is fairly simple. Drive around your preferred area and look for properties that appear to be distressed. Some of the signs to watch out for are an overgrown front yard, broken windows, and peeling paint. After compiling a list of addresses, do a little digging to see if any of the properties are on the market or for sale by owner (FSBO).
3. Ask Around From Family, Friends, and Acquaintances
Another traditional yet effective method for finding your first rental property is asking the people within your circle if they know someone selling a property. You simply need to tell your family, relatives, friends, co-workers, and neighbors that you’re looking to buy a property. Ask if they can recommend someone or if they know somebody who’s selling a home.
Sometimes, the people within your circle are willing to sell their properties. It is also a great way to find a good deal, especially if you can directly talk to the seller. Making constant follow-ups is recommended so your friends know you are serious about buying a property.
Common Mistakes to Avoid as a First-Time Real Estate Investor
As mentioned earlier, buying your first rental property requires avoiding a number of pitfalls. Here are the common mistakes every real estate investor needs to watch out for and how to avoid them:
Large Mortgage
Taking on a large mortgage that can eat into your cash flow is a big no-no. Learn how to calculate your potential monthly income based on your expected expenses and mortgage to avoid such a mistake.
Investing in Expensive Housing Markets
Certain housing markets are already expensive because the city is already saturated with a large population. Investing in expensive markets can help ensure that your property will grow in value in less time. However, it will not give you sufficient cash on cash return to gain enough profits.
Failure to Perform a Home Inspection
Often, investors who invest out-of-state buy a property without seeing it in person. Failure to do a home inspection is one of the major reasons an investment fails. Learn how to avoid this mistake by hiring a trusted professional home inspector to ensure that you know what you’re buying.
No Cash Reserves
If you’re investing in real estate, you must ensure that you have enough cash reserves to cover unexpected expenses. One of the things that you need to prepare a budget for is the cost of repairs. Also, set aside a certain amount for regular maintenance, which helps keep tenants satisfied and ensures a high occupancy rate.
Not Seeking Professional Assistance
As a beginner investor, it’s normal not to know everything about real estate investing and managing a home rental. You can learn the ropes as your experience grows. However, while you’re still new, you can seek professional assistance to help you with the things you don’t know. They include inspections, appraisals, and tenant and tax laws.
Related: Top 5 Tips for First-Time Real Estate Investors
Invest in Your First Rental Confidently
There is no reason to stress yourself out when investing in rental properties for the first time. Learning the process of how to find your first rental property can help you make an informed investment decision that leads to investing with confidence. You can apply the tips discussed in this article to help you get started.
Fortunately, you can use an all-around real estate platform to help make things a lot easier for you. Mashvisor is one of the best real estate analytics websites available in the market today. With Mashvisor, searching for the right investment property has never been easier. You can use its property search tool to find a rental home in your preferred area.
Mashvisor also provides complete real estate data and analytics reporting to help you evaluate the profitability of an income property. Moreover, its investment calculator allows you to determine whether or not a property will generate sufficient cash flows to cover your expected expenses. In general, Mashvisor allows you to invest in your first rental with confidence.
Sign up for a 7-day free trial with Mashvisor now, followed by a 15% discount after.