There’s no doubt about it: investing your money in real estate is one of the safest, smartest, and best ways to build wealth and reach financial independence. And while there are many ways for beginner investors to join the business, buying rental properties is definitely the most popular – and for good reasons. This, however, does not mean that you can never go wrong with a rental property investment. Unfortunately, while many investors start out with the intention of making it big in real estate, only a few get past their first investment and climb to the top of the property ladder.
Many think that real estate investors simply buy property, sit back, and watch it produce income. But the reality is not that simple. And if you don’t know the fundamentals of buying, managing, and selling real estate before investing your money, you’ll naturally make mistakes that’ll drag you down. We’ve created this guide to help you avoid that! Keep reading as we go through the basics of investing in rental property for beginners along with some tips to help you kick-start your real estate career on the right foot.
#1 Types of Rental Properties
Generally, there are 3 types of rentals recommended for beginners:
1) Traditional Rentals: These are investment properties that you buy and rent out to tenants for the long-term (typically longer than 1 year). The great thing about them is that almost every type of real estate fits as one. Single-family homes, small multi-family homes, large apartment buildings, condos, and townhomes can all be rented out to long-term tenants. Another name for traditional rentals is buy-and-hold properties.
2) Vacation Rentals: Investing in vacation rental property for beginners has become a popular approach in today’s real estate investing business. These investment properties are rented out to short-term guests (typically less than 6 months) and are listed on sites like Airbnb and VRBO. A real estate investor can list any type of housing on these sites from entire homes to apartments and private rooms. Depending on the location, Airbnb rentals can be even more profitable than traditional rentals!
If you’re into this rental property investment strategy, make sure to read about the 7 Things to Consider Before Buying a Vacation Rental Property.
3) Turnkey Rentals: These are also rented out traditionally to long-term tenants. What’s different about them, however, is that you buy them from companies rather than from individual sellers. Moreover, these companies will typically take care of managing the rentals and finding tenants. This makes turnkey rental properties very attractive for beginner investors who don’t have experience in property management.
#2 Making Money with Rentals
Next up in this real estate investing 101 guide is how to make money with rental properties. We’ve already mentioned that there are many benefits to owning a rental property, one of which is the fact that it offers a number of ways to build wealth.
- Cash Flow: This is simply the difference between the rent you collect and all your operating expenses. For example, if you’re renting out a single-family home for $1,500 a month and your total expenses are $900 a month, this leaves you with $600 dollars of monthly cash flow that goes back into your pocket as profit.
- Real Estate Appreciation: As a fixed asset, real estate will always have value. As time passes and the housing market changes, the value of investment properties typically goes up. So, when the time comes to sell your rental years later, you can sell it for a higher price than your initial investment and however much it has appreciated is an ROI.
- Passive Income: Owning and managing rental properties is an active business. However, there are ways for investors to make it passive and earn money without doing any work in return! One way, as mentioned, is buying turnkey properties. Another way is buying investment properties and having professional property management do the work for you.
- Tax Benefits: Finally, owners of investment properties can qualify for some of the most generous tax deductions and write-offs. This helps in reducing taxable income and making serious cash. For example, real estate investors can write off the interest on the mortgage, depreciation, repairs, maintenance on the property, and more!
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#3 Where to Invest in Rentals
One of the first things you’ll learn in your real estate education is “location, location, location.” This is a point that we can’t stress enough because where you’re investing in property determines the level of your success. In order to find out whether you’re in a good location for buying rentals, you need to do a real estate market analysis. This allows you to understand how the market is performing in terms of property prices, rental rates, price to rent ratio, occupancy rate, and other factors that determine how profitable investment opportunities in this market are.
Novice real estate investors also need to keep an eye out for trends that are common in the best places to invest in real estate. These include growing rental population, healthy economy, and a strong job market. Moreover, make sure to check landlord-tenant laws (when investing in traditional rentals) and short-term rental regulations (when investing in Airbnb rentals). After analyzing the housing market and making sure that it’s a good location for a rental real estate investment, you can start searching for properties for sale.
If you’re not sure yet where you want to buy your first rental property, consider these 10 Best Cities to Invest in Real Estate for Beginners.
#4 Process of Buying Property
We’ve prepared an entire step-by-step guide dedicated to teaching you how to buy rental properties, but here’s a quick summary of all you need to know. First off, make sure that you can afford the real estate investment by analyzing your financial standing. For financing a rental property, you should apply and get approved for a mortgage loan before doing an investment property search. You also need to have at least 20% of the purchase price saved up for a down payment as well as about 2-5% saved up for closing costs.
Haven’t found a good rental property for sale just yet? Use our Property Finder to quickly find lucrative investment properties that match your criteria!
The next step is to hire a real estate agent who has enough experience in buying real estate and working with investors. While some may forgo an agent, beginners definitely need their help as they’re just starting out. A good agent will help in finding profitable properties for sale, negotiating deals, handling necessary paperwork, and simply make the buying process easier for you.
Lastly, before closing the deal, don’t forget to do a rental property analysis. Just like a market analysis tells you if you’re investing in a good location, a property analysis will tell you if this property makes for a good rental. You’ll see what cash flow, cap rate, cash on cash return, and ROI you can expect to make. Beginners who don’t know how to calculate these numbers can use Mashvisor’s Real Estate Investment Calculator. This tool analyzes investment properties in any city/neighborhood in the US housing market using historical and predictive real estate analytics.
Mashvisor’s Real Estate Investment Calculator
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#5 Rental Property Management
After acquiring the investment property, it’s time to start making money. While a rental property pays for itself, it does not manage itself. That is your job as the property owner (unless you opt for professional property management, of course). Your first task is to market the rental to attract tenants. Then, you have to go through a screening process to make sure you find a good tenant who 1) pays rent on time and 2) wouldn’t cause damage to your property.
Another task you’re responsible for is knowing how much to charge for rent. The right rent price should cover your expenses and allows for positive cash flow. However, you don’t want to charge too high and end up pushing tenants away. One of the best real estate investing tips for beginners here is to find what comparables (real estate comps) rent for in your housing market and set your price accordingly. If you’re investing in a vacation rental, you need to have a dynamic pricing strategy because Airbnb rentals don’t have a set price all year-round.
To learn more about this, read: How Much Should I Charge for Rent?
Finally, every real estate investor needs to have his/her property running in a top-notch condition. This requires you to do regular checkups on the property and conduct any necessary repairs requested by your tenants. This will keep them happy and satisfied which will lead to a good landlord-tenant relationship.
The Bottom Line
In order for beginners to get started in real estate investing with confidence, they must know what it takes to be an investor. As you can see, it’s not as simple as some may think but, at the same time, it’s not rocket science either. Anyone can start a real estate business, but only those who know what they’re doing are the ones who will move forward and build a real estate empire! If you’re willing to invest money, time, and hard work and stay committed, you too can reach financial independence with rental properties.
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