Residential real estate properties are some of the most profitable investments that you could make. The combination of rental income and home value appreciation makes these assets the ideal option for real estate investors who are looking for a reliable return on investment. While you may already be aware of the benefits of investing in rental property, there is a good chance you are not familiar with the main steps to investing in real estate rentals. This is precisely what this article will seek to demystify. Keep reading as we show you how to invest in rental property as a beginner and breakdown every step of buying your first rental property.
Invest in Residential Rental Property in 5 Simple Steps
Starting a rental property business is one of the most accessible entries into the housing market. In fact, the learning curve that is associated with this venture is not as steep as other projects. Moreover, operating residential rental property serves as a good initiation into understanding how the real estate market works. The experience that you gain from these rental properties will be highly valuable when implementing more advanced real estate investment strategies later on. In any event, here is how you can invest in residential rental property in 5 easy steps.
1- Set your objectives
The first step of investing in residential rental property is setting your objectives. This is extremely important since it provides you with a much-needed road map for your venture. Real estate investors who jump in without fixing their goals will have a difficult time sticking to a coherent strategy. Here are some of the questions that you need to address when buying rental property:
- What is the maximum amount of money that you would be willing to put as a down payment?
- How much cash reserves do you have at the moment?
- Do you want to invest strictly for cash flow or does your investment strategy factor in appreciation too?
- Do you need to start generating positive cash flow right away or would you be willing to operate on a longer time frame?
Having clear answers for each of these questions will allow you to determine the type of investment property you need to invest in as well as the strategy that you should implement.
Related: Set Your Real Estate Investment Goals the Smart Way
2- Look for an ideal real estate market
Before you start looking for a residential rental property for sale, you must first pick a real estate market that is conducive to generating a profit. A market that is suited for real estate investing should boast a wide range of qualities. Below is a brief look at some of them:
- Positive demographics trends: A growing population is what ensures the long term viability of residential rental property investment. Consequently, you should look for areas that are experiencing an influx of new residents as well as a healthy native population growth rate.
- A strong job market: A healthy job market is one of the most reliable indicators when it comes to assessing the potential of a real estate market. Not only should job growth be trending upward, but there should also be a wide range of sectors and employers in the area.
- Encouraging economic trends: It goes without saying, you should invest in residential rental property in areas with a healthy economy. Some of the indicators that you should focus on include wage growth in the area, startup activity, and gross metro product.
Related: 5 Best Rental Investment Markets for 2020
3- Find a profitable residential rental property
The key to buying residential rental property that can yield high returns is being able to identify the top investments in any housing market. Fortunately, everything you need to achieve this can be found right here on Mashvisor. Let’s take a closer look at the tools that will help you zero-in on the perfect residential rental property.
- The Real Estate Heatmap: The heatmap analysis tool is a practical search engine that combines neighborhood data with visual cues. Real estate investors can use it to locate the top-performing areas in any market across the country.
- The Rental Property Finder: The Mashvisor Property Finder is a highly advanced tool that employs the latest in AI and machine learning technologies. The results that it provides are highly profitable and perfectly match your criteria.
- The Rental Property Calculator: Once you have picked an investment property, Mashvisor grants you access to a rental property calculator that helps you assess its profitability. Using it allows you to determine everything from cash flow and expenses to the cash on cash return and cap rate for residential rental property.
4- Lock down your investment property financing
Financing rental property can be made very easy if you take the time to explore all your options. Determining an ideal financing method depends on your financial situation as well as the real estate investment strategy that you plan to execute. For most types of residential rental property, a conventional loan can cover the purchase. Here are the requirements that you have to meet in order to obtain a conventional rental property mortgage:
- A down payment of at least 20%
- A debt income to ratio that is around 36%
- A credit score of at least 680
First-time buyers can qualify for FHA loans. These government-insured mortgages offer more flexibility than conventional loans and require a down payment of just 3.5%. Just keep in mind that you will have to live in the investment property for at least a year. Other rental property financing methods that might be able to offer you favorable terms include private financing and hard money loans.
Related: Financing a Multi Family Property: A Beginner Investor’s Guide
5- Get the investment property inspected and appraised
Carrying out a professional inspection is essential before making an offer. In fact, this is the only way to ensure the structural integrity of the investment property and avoid costly repairs after the fact. As for the appraisal, it allows you to determine the true value of the home and make an offer that is in line with the intrinsic price of the investment property.
The Bottom Line
Investing in residential rental property might be the simplest way to reach your profit goals and achieve financial independence. As long as you stick to the simple guidelines outlined above, you should be able to breeze through the process.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.