If done right, investing in real estate is one of the best ways to generate income and build wealth. If you are wondering how to get into real estate, buying rental property can be a lucrative real estate investment strategy to consider. Investing in rental houses has many advantages including regular cash flow, appreciation, tax benefits, and leverage. However, like every other business, investing in rental properties for beginners comes with some risks. If you want to avoid common mistakes that beginner real estate investors make and maximize your returns, this article is for you. We are going to take you through how to start investing in rental properties in 2021 step by step.
1. Real Estate Education
While this guide is going to teach you the basics of how to start investing in rental properties, you need to invest more in your own real estate education. Building a good knowledge base before getting started will help you avoid critical mistakes.
There are many ways to learn how to invest in real estate, both free and paid. Some common sources of information regarding how to invest in real estate include real estate books, real estate blogs, e-books, real estate podcasts, and real estate videos. It’s also important that you find a mentor. This can be a seasoned investor from whom you can learn about real estate investing for beginners.
2. Building the Right Team
To be a successful real estate investor, you must have the right team of professionals to work with. Real estate is a people business. You need people with functional expertise and experience to help you with the different aspects of the real estate business. This includes real estate agents, accountants, real estate attorneys, home inspectors, property managers, and more. All the players in your team will contribute to the success of your investment business. As your portfolio grows, you’ll need a bigger team.
Building a large real estate network is a vital part of investing in rental properties for beginners. Therefore, invest time in building your dream team. You can begin by asking for recommendations from other real estate investors you know and trusted advisors. Build your network in the real estate market further by attending real estate networking events and making use of social media.
3. Market Research
Before you think of buying rental property, it’s important that you pick an ideal market. When investing in rental properties, location is everything. Home rentals can vary widely in price and returns depending on location. The last thing you want is to be stuck with a vacant income property after spending thousands of dollars to purchase it in addition to making monthly mortgage payments. Therefore, you need to conduct a thorough real estate market analysis to locate the perfect investment location for your budget and investment goals. This can be done in two key steps:
Find a Profitable City to Invest in
Finding the perfect market to invest in needs a lot of research. One of the easiest ways to find profitable markets is to check for market data on rental websites. For the US housing market, you can find city-level data on Mashvisor’s real estate blog. With this data, you can even invest in out-of-state home rentals. Sometimes the best investments may be beyond where you live.
Find the Best Neighborhood in the City
After choosing a city to invest in, conduct a thorough neighborhood analysis to locate the top-performing area within your chosen markte. You can do so in a matter of minutes using Mashvisor’s real estate heatmap. This tool uses different color codes to show how different neighborhoods are performing in terms of average rental income, property price, cash on cash return, and Airbnb occupancy rate. For instance, if you are looking for cheap property for sale, you want to focus on areas with a low listing price.
4. Run the Numbers
Before you select which investment property for sale to purchase, you need to analyze multiple properties to determine the most profitable opportunity. This usually involves gathering property data and working out expected returns. If you are analyzing multiple properties using a spreadsheet, this can be a very time-consuming process.
Mashvisor’s real estate investment software makes investing in rental properties for beginners easier by enabling investors to conduct an accurate investment property analysis in a matter of minutes. With the investment property calculator, you can calculate key real estate metrics such as rental income, cash flow, cash on cash return, cap rate, and occupancy rate. For each of these metrics, the calculator will provide Airbnb vs renting values. This allows you to easily determine the optimal rental strategy for any investment property for sale in the US market.
5. Investment Property Financing
Investing in rental properties requires a lot of initial capital. However, it doesn’t have to be your money. Instead of using all your savings to buy one property, you can obtain the leverage of using an investment property loan. There are different types of investment property loans with different qualification requirements, terms, and interests. You need to assess your current financial situation to determine the most suitable financing option for you. It’s also important that you compare offers from different lenders.
To increase your chances of qualifying for an investment property loan and getting better rates, make sure your finances are in order before you buy a rental property. Make sure you have a good credit score and a sizeable down payment.
6. Finding a Good Tenant
Your income property investment is only profitable if it is occupied, rent is being paid on time, and tenants keep it in a good condition. Marketing the property to potential renters is not enough. You want to find reliable tenants who will pay their rent on time and take good care of the property like it’s their own.
Therefore, it’s crucial to screen potential tenants before you rent a house. Check their employment, eviction, and criminal history. If you don’t screen tenants, you may end up with bad tenants and be forced to evict them. This comes with additional costs. However, be careful not to discriminate against renters on the basis of race, age, ethnicity, family status, religion, or disability to protect yourself from a lawsuit.
7. Rental Property Management
Getting a tenant doesn’t mean you relax and wait to be paid rent monthly. Renting a house comes with responsibilities. You need to handle tenant inquiries, collect monthly rent, conduct inspections, do routine maintenance, and more. If you have time and own only one rental property, it is possible to manage it yourself.
Alternatively, you can choose to hire a property manager to handle the operation and maintenance of the property for you. Furthermore, investing in vacation rental properties for beginners is trickier because it needs more hands-on management. Therefore, if you are a busy person, you may want to consider help from an Airbnb property management service.
Investing in Rental Properties for Beginners: The Bottom Line
If you are looking for a lucrative way to generate cash flow and build wealth, investing in rental properties is a great option. However, before you get started, you should understand that investing in real estate is not a get-rich-quick scheme. If you want a profitable real estate investment, you have to put in the work. By following our guide on investing in rental properties for beginners, you can make your dreams come true. Be sure to use Mashvisor’s real estate investment tools to find the most profitable locations and rental properties in the US housing market. Sign up for a 7-day free trial now.