If you’re new to real estate investing, then you must be wondering how to start a rental property business.
When you first start in real estate investing, most experts will recommend starting with a rental property.
Rental properties are the most common entry-level investment in real estate for beginner real estate investors. Not only that, but they can also generate some of the highest returns in the real estate business, and they have several other benefits associated with them, such as rental income (which acts as a secondary or a primary source of income).
So, if you’re interested in investing in rental properties, then you must be wondering how to start a rental property business.
Below are 5 simple steps that every real estate investor will go through when investing in rental properties and when he/she starts his/her rental property business.
How to Start a Rental Property Business – Research
The first and foremost step towards any real estate investment, especially if you’re a beginner investor, is doing your research.
Real estate investors must research all the different aspects of real estate investing and rental properties in particular, in order to learn as much as they can before they risk their money and commit to an investment.
Before starting out, you should focus on researching the basics of real estate investing and the aspects related to it. At this stage, you should learn the basic concepts such as the types of real estate properties, investment strategies, types of rental properties, the laws and regulations that affect the real estate market, the indicators that are used to predict where the market is going, and the tax rules that will apply to each property class.
While this seems like a long to-read list, it is absolutely crucial for the success of your career as a real estate investor. Knowledge and the continuous will to learn are the cornerstones of any successful real estate investor. So, even if you feel like you’ve learned enough to invest in a rental property, you shouldn’t stop there. You should always seek new knowledge and experience in the world of real estate in order to be able to compete with the tens of thousands of active investors out there.
How to Start a Rental Property Business – Pick a Niche
After doing your research, your next step would be to pick a target niche.
When learning how to start a rental property business, you’ve already made the choice when it comes to the investment strategy that you want to use. However, there are different types of rental properties and different strategies for investing in them.
When learning about the different types of rental properties, you will come across two main types that are very common:
- Long-term (traditional) rental properties
- Short-term (Airbnb) rental properties
Each of these types has its own unique advantages and disadvantages, as they function very differently from one another.
Short-term rentals, in particular, require more research for investing in them due to the complicated laws and rules surrounding them, and how these laws differ from one location to another.
Additionally, there are multiple strategies that you can use for investing in rental properties. For example, you can start a rental property business using your own home or primary residence by renting out a room or a section of your house.
You can also invest in rental properties abroad and rely on professional property management companies to run and manage the properties for you.
Learning as much as you can about these different aspects will help you determine which one you want to focus on, and this type of property or strategy will become your niche.
How to Start a Rental Property Business – Financing
One of the major aspects of real estate investing is the method used for financing the purchase of an investment property. Choosing between cash and mortgage for purchasing an investment property is an important decision when figuring out how to start a rental property business.
Using cash to purchase an investment property and turn it into a rental property will result in a higher cash flow or profits, but you will have to commit a larger amount of money for purchasing the property using all cash.
Using a mortgage for purchasing an investment property is typically a better choice when you’re considering rental properties. This is because the rental income that the tenants will pay to you for staying in the property can be used towards paying off your mortgage. This, however, will result in smaller profits in the short run, but higher profits on the long run.
Additionally, there are several types of mortgages that you can obtain for purchasing an investment property. Some of these include:
- Conventional Lender Mortgage
- Portfolio Lenders
- Federal Housing Administration (FHA) Loans
- 203K Loans
Reading about the different types of loans or seeking the advice of a financial expert will greatly help you pick the most suitable option for your investment.
How to Start a Rental Property Business – Searching for Properties
Finding the right investment property to purchase and turn into a rental property is the most crucial and the trickiest stage of investing in rental properties.
To find the right property for you, you will need to research the different markets (cities and neighborhoods) to find a market that is within your price range or budget, and where rental properties perform well and have a good rental rate.
This also requires a lot of research and time commitment. However, there are numerous online platforms, such as Mashvisor, which can allow you to find the right market for you with ease, and which will provide you with sufficient data on each market or property to help you identify the most suitable options for your investment.
Choosing the right property will also rely heavily on the investment strategy that you chose, the type of financing that you’re using, and your overall knowledge of the market and how to read it. So, make sure to tread carefully and to make up your mind on each step in order to choose the right property for investing.
How to Start a Rental Property Business – Cash Flow and Analytics
While this step is the last one before you start your rental property business, it is also relevant in the previous step (searching for the property). Understanding the different metrics and methods of calculating the rate of return on a rental property is very important when trying to find the right property as well as once you’ve found it.
First of all, the most important thing to look at when it comes to rental properties is the property’s cash flow. A property’s cash flow is the amount of rental income that is left over after you’ve paid off all expenses on the property.
This cash flow can be either positive or negative. A positive cash flow is good, and it means that your property is profitable. A negative cash flow, however, is what you need to watch out for. If a property has a negative cash flow, it means that it is costing you more money than it is earning.
These metrics can also be used during your search for the property as they will allow you to identify the properties that are expected to have the highest returns.
Mashvisor can also provide you with these metrics for each property, as well as their averages for each neighborhood, to help you find the best market and the best property to invest in at the least amount of time.
Starting a rental property business is not an easy thing to do, but it’s also not rocket science. Anyone can start a rental property business if they follow these steps. So, the next time you wonder how to start a rental property business, make sure to immediately start with the first step, which is researching and learning all there is to the business.
Lastly, to help you start your business faster and help you succeed, Mashvisor’s platform was designed specifically for the rental property market and to help beginner real estate investors get into the market at the least amount of time and effort, while also giving them the real estate analytics that they need to make the wisest investment decisions.