Thinking of renting out a house as a way to make money in real estate investing?
Rental properties are the most common type of real estate investments. A real estate investor would have to buy a property, rent it out to a tenant, and start enjoying a stream of rental income. However, not all aspiring property investors can afford to buy a rental property. If that’s the case for you, don’t let this stop you from becoming a real estate investor! Many beginner property investors started out their careers by renting out their own homes while they stayed in cheaper apartments. If you’re interested in renting out a house as an investment property, there are certain things you should keep in mind and take into consideration.
#1 Demand for Rental Properties
The first and most important factor to consider before renting out a house is the demand in the real estate market where you’re renting out. Demand plays an important part in a successful real estate investing career because it determines other aspects related to rental properties such as occupancy rates and rental income – both of which determine how profitable an investment property is.
It’s important to know these aspects when renting out a house because your goal, as a real estate investor, is to make money from the rent collected from tenants of your rental property. Therefore, when demand for rental properties is high, property investors can easily find tenants and enjoy a high occupancy rate. Furthermore, real estate markets with high occupancy rates typically have higher rental income, meaning renting out a house in such markets could yield a good return on investment.
To evaluate the demand in a certain real estate market, property investors have to conduct a real estate market analysis. Alternatively, Mashvisor’s investment property calculator provides detailed neighborhood analysis and numbers regarding occupancy rates, rental income, and median property prices of rental properties. Using this tool, a real estate investor can easily compare different neighborhoods and find out whether or not a certain neighborhood is good for renting out a house! To start out your 7-day free trial with Mashvisor and start using this real estate investing tool, click here.
#2 The House’s Condition
Just because you decide to put your home on the real estate market as a rental property, doesn’t mean that someone would want to rent it right away. Your house might not be appealing or attractive to renters. Thus, the second thing to consider when renting out a house is the condition of the investment property. Ask yourself: is my house rentable? As a real estate investor, you might need to conduct a few repairs and renovations for your home to pass as a rental property which you can rent out and make money off of.
To answer this question, property investors conduct a real estate market analysis to have a look at rental properties in the area and find out the features that make an investment property attractive and appealing to tenants. Moreover, you need to perform a rental property analysis to determine the profitability of renting out a house. Also, keep your target tenant in mind – for example, if you’re renting out a single-family house, make sure it’s suitable for a family to live in for the long term. A vacation house rental, on the other hand, would be more appealing to travelers staying for the short term.
#3 Laws and Regulations
If you want to become a real estate investor through renting out a house, it’s important to know if laws in your local real estate market allow it! There are a number of laws and regulations that apply to landlords and property investors that you should be aware of to ensure that your property investment is legal and that you’re not breaking any law.
Among the things to know before renting out a house in this regard is The Repairing Standard, the tenancy agreement to inspections, rent collection, termination of the lease, landlord-tenant law, and the Residential Tenancy Act. Moreover, since certain tax deductions apply to property investors, a beginner real estate investor should consult a certified public accountant and look up all relevant tax codes related to rental properties and understand what he/she can deduct.
Keep in mind, some laws and regulations differ from one state to another. Thus, make sure you research the federal, state, and local housing laws in your real estate market to understand your rights and obligations as a real estate investor. This way, you’ll ensure acting in a legally compliant manner while renting out a house as an investment property.
#4 Rental Costs and Expenses of Renting Out a House
Although renting out a house is an excellent way to start real estate investing and have an added source of income, don’t assume that all of your profit will go straight into your pocket! Turning a house into a rental property comes with rental expenses that every real estate investor has to bear in mind.
First, you need estimate how much it’ll cost to repair your investment property and make it rentable. Then, when you start renting out a house, you need to ensure your rental income is high enough to generate positive cash flow to cover all your rental expenses like monthly mortgage payments, property taxes, insurance, management fees (if you decide to work with a professional property management company), maintenance, and so on.
Another thing to consider when renting out a house is how much to charge for rent. This is actually very important because if your rental income is lower than your rental expenses, then your rental property will generate negative cash flow (meaning you’re losing money instead of making money). On the other hand, if you charge too high, no tenant will want to rent your house! Knowing the rental rate in your local real estate market will help you set the right rent.
Mashvisor’s rental property calculator will be of great help in this regard! This real estate investing tool provides an estimation of the average rental income property investors can expect to make in any city and neighborhood across the US real estate market!
To start looking for and analyzing the best rental properties in your city and neighborhood of choice, click here.
#5 Rental Property Management
Next on the list of things to consider when renting out a house and becoming a real estate investor is one key to successful real estate investing – property management. Managing an investment property requires time, effort, organization, and attention to details. So, before turning your house into an investment property, ask yourself: Am I capable of managing a rental property? While some property investors prefer managing their own rental properties, others opt for hiring professional property management.
Professional property management takes care of all aspects related to a rental property for a fee. A good property management company will find tenants, advertise the investment property, collect rent, handle repairs, maintain the investment property, and take care of evictions. This will definitely make renting out a house a headache-free investment. However, beginner property investors have to ensure their rental income can cover professional property management fees as they could be quite hefty.
#6 Finding and Screening Tenants
With rental properties, your main source of income is the rent you collect from tenants. Thus, what’s the point of renting out a house without tenants? No real estate investor wants a vacant investment property, so make sure you find a tenant as soon as you put your house on the market for rent. Don’t get us wrong, we’re not saying to rent out to the first person who fills out an application form. What we’re trying to say is know how to advertise and market your rental property to reach potential tenants.
Renting to family and friends is generally not advisable. Learn how to differentiate good tenants from bad ones. A good tenant is someone able and ready to pay rent in due time who will not damage your rental property. When renting out a house, these are the kind of people you need to find! To achieve this, a real estate investor must perform a tenant screening process. Successful property investors review applications thoroughly, do background checks (like credit reports and criminal history), and contact references (like employers and previous landlords), and are aware of red flags indicating a bad tenant.
#7 Writing a Lease for Renting Out a House
Lastly, renting out a house as an investment property requires you to write a lease agreement. Always avoid handshake deals! A written lease assures that both you and your tenant understand your rights and obligations. A good lease complies with fair housing laws in your local real estate market. As mentioned, these laws differ across the US. Thus, it’s best for beginner property investors to work with a local real estate lawyer. According to Forbes, a lease should include:
- Lease term
- Security deposit
- Rental due date and late penalties
- Repairs and who’s responsible for what
- Maintenance responsibilities
- Rules of behavior
- Pet policies
- Eviction terms
These are the most important considerations for anyone thinking of renting out a house as an investment property and becoming a landlord. Even though this is a common way of making money in real estate investing, you still need to take these factors seriously in order to successfully turn your home into a rental property. To learn more about all aspects of real estate investing, continue reading our blog.
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