The Ultimate Cheat Sheet for Investing in Rental Properties

Investing in rental properties can be a good source of income through monthly cash flow and a great opportunity to build wealth. Investing in rental properties has proven over the years to be an effective wealth creator for the long-term if done properly. Could investing in real estate be the right choice for you? Below are a few tips to help ensure that it is a profitable venture for you.

1. Select a Great Location

Investing in rental properties is all about location. You need to search for the right location with a high profitability potential. Locations that are ideal for investing in rental properties are those that are near public transportation and amenities like schools, commercial spots, and malls. For instance, investing in rental properties close to universities can be ideal since students will need houses near the universities to rent. You can also consider exploring locations that are near tourist sites and are flocked by tourists. Moreover, investing in rental properties in a location that is too expensive is not practical since you need to earn back your initial investment. By investing in a good location, you make breaking even and the chance to make more profit easier.

Consider these locations: 8 Best Cities for Real Estate Investment 2018: Part 1

2. Start Small

When you are new to investing in rental properties, you should begin with an initial investment that is affordable such as a single-family home instead of a whole apartment building. Investing in a single-family home is one of the simplest ways to get started in real estate investing for beginners. This way if things don’t go well and you can’t afford to make payments for maintenance or mortgage, you don’t risk going bankrupt.

Since you are just getting started, you should avoid investing in rental properties that need significant repairs to avoid overextending yourself. Upkeep for single-family homes is easier than commercial or multi-family properties. There is less wear and tear on the rental property when its only one tenant and so you will have fewer things to fix.

3. Do the Math

In your investment property search, each rental property should be treated like its own business for it to serve as a great investment. One of the most vital considerations when investing in rental properties is to accurately do an estimation of the rental income as well as the costs that come with leasing. These monthly expenses may include insurance, property management, debt or mortgage service, pool and lawn services, and taxes.

The best real estate investments always have positive cash flow as well as a good rate of return. Otherwise, the landlord risks buying an investment property with a net loss each month rather than profit. Banking on appreciation only is never a good idea. If you do the math and find out that the rental property does not at least break even, you should just move on to another deal. You need to focus on investing in rental properties with a high return on investment. To obtain the highest return on investment, you will have to know the area and the prices at which houses are being sold in the neighborhood and perform a real estate market analysis or neighborhood analysis.

4. Know the Local Laws

Local laws protecting both landlords and renters are usually different in different locations. There are so many aspects of investing in rental properties that are affected by local laws such as finding new tenants and lease signing. A local real estate attorney, property manager or real estate agent can offer you information about some of these local laws if you have any concerns or questions regarding them.

5. Use Leverage

Investing in rental properties requires that you have a good understanding of the mortgage market. Getting the right mortgage will not only help you to keep your costs low but also diminish uncertainty about the cash flow of the property. By making use of leverage, some of your cash will be freed up so that you can save it for other expenses like repairs or for investment in the future. However, you need to be very cautious and consult a professional since there are financing costs that are associated with a mortgage.

Related: Real Estate Investments and Leverage- All You NEED to Know

6. Work with Real Estate Professionals

When you are considering investing in rental properties, you should consider making use of real estate professionals such as property managers, realtors, contractors, and attorneys to help you with the process. You can ask friends and other investors for referrals for such professionals.

Related: You Need These Real Estate Professionals for the Success of Your Investment Business

7. Don’t Do Too Many Improvements on the Property

To ensure that your cash flow is kept at optimal levels, you should not spend a lot of money on upgrading a rental property that will also require repairs and maintenance during turnovers. You shouldn’t go outside the minimum standards. This ensures that your monthly rent is more than the monthly expenses, with a substantial cushion. The type of maintenance will depend on the type of rental property. For instance, the landlord of a single-family home is usually responsible for such things as snow removal and lawn mowing, but for a townhouse or condo, such maintenance is incorporated in the condo fee.

8. Tenant Screening

Proper choice of tenants is vital when investing in rental properties. Ensure that you screen your tenants with a credit score check, background check, and landlord-tenant records. For instance, tenants who have been in a landlord-tenant legal dispute, have a history of late payment or have poor credit may cause too much stress and make being a landlord complicated. Screening tenants can save you stress and time later in the long run by reducing eviction and vacancy losses. In cases where the property was already occupied when you bought it, ensure that the tenants living there are trustworthy. You can request their credit checks, rental payment history, and background checks from the previous owner of the property.

Related: Tenant Screening Process: Red Flags Landlords Should Not Ignore

Making money in real estate by investing in rental properties can be a lucrative option if you know how to go about it and take the necessary precautions. With sufficient due diligence and the tips above, it is worth considering. Sign up with Mashvisor to access a variety of real estate investing tools used by expert real estate investors when investing in real estate.