We all know that investing in rental properties can either be a great source of income or a huge headache for investors. The trick is to turn this type of investment into a great opportunity to build wealth and achieve monthly cash flow. How? By using our magic formula! With a pinch of tricks and a pinch of tips, we can show you how easy it is to invest in rental properties! Follow along with me as I sprinkle you with some magic.
Related: Is Investing in Rental Properties the Ultimate Way to Succeed in Real Estate Investing?
The enchanting benefits of rental properties
The advantages that come with owning rental properties are relatively few but are powerful enough to put you under their spell. If everything lines up well, you could make a lot of money from a rental property.
1. Monthly income from Tenants
Maybe the most enchanting benefit that comes from rental properties is the steady monthly income you receive from tenants which goes straight into your business account. So if you don’t have many unpaid monthly expenses, your rental property will become your major source for positive cash flow.
2. Income from property value growth
Since you are the owner of the property, you stand to gain from an increase in property value over time. Rental properties can provide appreciation in the long run if the property value increases over time due to changes made by the owner and as the owner increases equity in the property by paying down the mortgage. Consequently, rental income can be increased.
3. Abracadabra, turn this property back to new!
That’s right! I’m talking about sweat equity. Your sweat equity is likely to add value to your rental property as you maintain it and upgrade it. When you do things to your investment property like repainting it, fixing up the inside or doing some basic landscaping to the yard, you are adding value without significant financial costs. Not only will this allow you to charge more for rent, it will also increase the value of the property itself should you choose to sell it in the future.
Related: 6 Rental Renovation Tips to Know Before Spending Any Money
Let me now present to you your fairytale guide to investing in rental properties so you don’t fall into the pitfalls new real estate investors tend to.
Choose a location
Oh mirror, mirror on the wall, where is the best location of them all? The key to great and successful residential rental properties is LOCATION! You want to search for a location that has public amenities such as schools, universities and public transportation. Focus on a location with growing employment opportunities and any new future developments. These key factors tend to attract tenants more and in return, give a better chance of success with your rental properties.
Related: How to Choose the Right Location for Rental Properties
Let us help you find the best locations. To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Start small
Investing in rental properties doesn’t have to be overly complicated. You can start small and keep it simple. You can start investing in small single units or a duplex instead of jumping straight to apartments or houses. You also want to avoid investment properties needing significant repairs because this can become a heavy load for you to handle in the beginning.
You see we have two types of people in real estate investing: the beauty and the beast. The beauty is the one who takes things slowly and guarantees a solid ground to walk on in the future of real estate, while the beast is the one who wants to reach the top without climbing any steps. The beauty always triumphs. Do not rush yourself and add more to your plate than you can manage.
Run your numbers again and again
The most important consideration for potential landlords is to accurately estimate the rental income and costs associated with renting. Until a landlord has a precise grip on these issues, he/she risks owning a property that, rather than becoming a profitable investment is a net loss every month. Betting on real estate appreciation alone is not a good idea. Rental purchases should have positive cash flow and a good rate of return. That could be anywhere from 8 to 15 percent in a residential market. Vacancy, turnover, and eviction are realities of renting any property, so wise owners must assume at least a month’s rent loss annually.
Why not use Mashvisor to run the numbers? To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
Related: Question of the Day: How Much Rent Should I Charge?
Don’t over improve the property
They say a little extra magic doesn’t hurt but when it comes to improving your rental property don’t overuse your magic wand. To keep your cash flow at the best level, don’t spend too much on upgrades or home improvements for a rental property that will likely need maintenance and repairs during turnovers anyway. Because maintenance is also a given when owning rental properties, real estate investors can buy a home warrant that costs $500 per year and spread out the cost of repairs using it.
Choose tenants wisely
Finding the right tenants is never an easy task. Unless you have a genie in a bottle and are granted three wishes, then you should be careful when choosing your tenants. With tenants, there is never a guarantee that they will pay their rent. Even in the best of times and with the best tenants, that revenue stream is far from guaranteed. Sure, sometimes you’ll get a great tenant that pays their rent on time for years and years and years and some tenants won’t pay regularly, and others won’t pay at all. You’ll be out several months of rent and also the time spent dealing with their non-payment and eviction. So choose wisely!
The bottom line
For some people, owning a rental property might not be the most magical financial move they make. But if they’re in good financial shape already, have some spare time on their hands, and don’t mind handling home maintenance emergencies, a person who puts in some patient time finding the right property to rent can make a very nice profit on a rental property.
The important thing to remember is that investing in rental properties is definitely one of many options on the table, and it is a good option for some people. Take into consideration your own financial state, your personal strengths, and your interests and make up your own mind about whether rental property ownership is the right move for you.