Over the years, investing in real estate has proven to be the safest investment to secure both your current and future life. And even though there are multiple investment strategies in the industry, buying and owning rental properties is the most common. Nonetheless, investing in rental property for beginners who don’t have the basic knowledge of investment isn’t as simple as it seems. Naturally, in order to become a successful property investor, you need to get familiar with the process before investing your money in the housing market.
Investing in rental property for beginners requires understanding the types of rentals, how to make money from the investment, and the process of buying and managing these properties. The guide that we’ve compiled below will help beginner property investors understand all of that (and more) to help them kick-start their real estate investing career. So, without further ado, let’s jump right in.
Investing in Rental Property for Beginners – Types of Rentals
The first thing that any aspiring real estate investor needs to understand is the different types of properties that will make money as rentals. The 4 most common property types in the rental market are:
1) Long-Term (Traditional) Rental Properties
These are investment properties that you buy for the purpose of renting them out to long-term tenants (longer than 1 year). Another name for them is buy-and-hold investment properties. Single-family, multi-family (duplex, triplex, etc.) and apartment buildings are the most common properties to rent out for the long-term.
2) Short-Term Rental Properties
Renting out to short-term tenants (typically less than 6 months) is quickly becoming a popular approach to real estate investing. These are properties or units that you list for rent on short-term rental websites like Airbnb, HomeAway, and VRBO. You can list almost any type of housing on these sites, including beach homes, condos, or a room in your primary residence.
Related: Real Estate Investing: Traditional vs. Airbnb Investments
3) Turnkey Rental Properties
These are investment properties that you can buy and rent out for the long-term, but what makes them different from traditional rental properties is that they’re purchased from companies. These companies work as a third-party responsible for managing the investment property. As you can imagine, turnkey properties are desirable for investing in rental property for beginners as all they have to do is “turn the key” and enjoy rental income while someone else manages the investment.
4) Commercial Rental Properties
Commercial properties are those rented out to businesses rather than residents. These include retail buildings, warehouses, office buildings, apartment buildings, mixed-use buildings, and industrial buildings. Although they can be a lucrative investment, they’re not recommended to beginner property investors. For this reason, the rest of this guide is aimed at investing in residential rental property.
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Investing in Rental Property for Beginners – Making Money
What makes this quote so true is the fact that there are several ways that you can make money out of your real estate investment. Here are the 3 main ways from which you can become a wealthy real estate investor:
- Cash Flow: This is simply the sum of incoming rental income minus the outgoing cash for rental expenses. Basically, a real estate investor uses his/her rental income to cover mortgage payments, insurance, taxes, and other expenses. Whatever’s left goes straight into his/her pocket as profits.
- Appreciation: Real estate is a fixed asset, meaning it’ll always have value. Appreciation refers to the fact that the value of a real estate investment increases the longer you hold your property. As a result, when the time comes to sell a rental property, its value will have gone up allowing you to sell it for a higher price.
- Passive Rental Income: This is the money you make from a rental property when you don’t do any work in return. This works when you invest in a turnkey property or hire professional property management. The company will do all the work for you while you sit back and enjoy a passive rental income.
Investing in Rental Property for Beginners – Where to Buy
“Location, location, location!” Where you decide to buy an investment property will determine your success or failure in the business. The best places to invest in real estate have similar things in common, including a growing economy, job growth, and increase in population. Other factors to a good location are low crime rates, high occupancy rates, reasonable property prices, and high rental rates. Combined, all of these factors (and more) create lucrative investment opportunities. This is why it’s not always smart to invest where you live – it might lack these success factors!
Related: Location Location Location: What Makes for the Best Place to Invest in Real Estate?
Another thing worth mentioning is to get familiar with landlord-tenant laws. You want to look for housing markets that are landlord-friendly and don’t enforce regulations limiting or affecting your investment. This is especially important if you’re aiming to invest in short-term rentals! Some housing market across the US ban renting out on Airbnb or other sites and consider them illegal.
At Mashvisor, we always encourage property investors to stay in-line with the law. We also help in finding profitable investment properties in the best cities and neighborhoods across the US. To learn more about our product, click here.
Investing in Rental Property for Beginners – Purchasing Process
First things first, apply and get pre-approved for a rental property mortgage loan before you even start searching for your future property. Moreover, make sure to do the math and analyze your financial standing to make sure you can afford a property investment. Save up for a minimum 20% down payment and closing costs.
The next step is to find a real estate agent. Some assume that agents have become obsolete in a real estate transaction. However, when you have no experience and are buying your first investment property, they are definitely needed. A real estate agent will help you with all the necessary paperwork, negotiating deals, and finding the property that meets what you’re looking for. They’ll further provide you with the best advice, answer any additional questions you may have, and simply make the purchasing process easier.
Finally, when you’ve found a property for sale, don’t forget to analyze its potential for making money as a rental. Mashvisor’s investment property calculator will help you analyze different investment properties in any city across the US housing market using real estate analytics. To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Investing in Rental Property for Beginners – Property Management
After you’ve become an owner of an investment property, the real work begins! As a real estate investor, you’re responsible for managing the rental property and assuring that it is generating rental income (unless you’ve hired professional property management, of course). The first task is to find good tenants to rent the property out to. Make sure you do a thorough tenant screening to assure whoever is renting your property will take care of it, pay rent on time, and won’t cause a bundle of problems for you as a landlord.
Related: Tenant Screening Process: Red Flags Landlords Should Not Ignore
Another important task to take on is setting the right rent price. Of course, you want to make a profit by having rental income that’ll cover your expenses and leave you with positive cash flow. However, don’t charge too high to the point no one can afford renting your investment property! Thus, conduct a comparative market analysis to find out how much other property investors in your area with similar rental properties are charging and set your rent within that range.
Another thing any real estate investor must do for a successful investment is to maintain the property. Visit the property regularly and conduct any necessary repairs. This will not only keep your tenants satisfied but will also increase the demand for your rental property, which will further increase its value over the long-term.
Investing in Rental Property for Beginners – Conclusion
As a beginner real estate investor, there are plenty of things you need to learn about investing in rental property before you actually buy one. Doing so will help you start your business with the confidence you need to reach success. I hope this comprehensive guide gave you all the essential information and encouraged you to learn more about real estate. If it did, head over to our blog where you’ll see thousands of articles that’ll teach you everything and anything real estate.
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