24 Ways to Invest in Rental Real Estate

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Invest in Rental Real Estate

3. Make sure you have needed financial reserves.

Owning a rental property can have unexpected problems.

Your tenant can lose their job and not be able to pay the rent.

You have to have enough money in the bank to get you through months without any money coming in.

There are owners who are dependent on the rent to pay their mortgage.

If you are in that situation then do not buy until you have a six month reserve built up.

• Remember that you will also need to pay for property taxes and regular maintenance on the property.
• Unexpected expenses can arise from anywhere. The cost of each can range from negligible to very expensive.

Invest in Rental Real Estate

4. Invest for the long term.

Never buy real estate as an investment unless you have a 10 to 15 year horizon.

Housing bubbles seem to come every 10 to 15 years and everyone wants a piece of the action.

The great majority of people never get the chance to get out in time and get financially hurt.

The wise investor is not swayed by greed and quick returns.

They buy homes that make financial sense as a rental, not as a quick opportunity to make money.

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5. Locate partners.

Investing with a partner or partners can provide a number of benefits.

Partners can pool resources and talent between them, allowing for greater potential investment success.

However, you will need to find partners that are fair and easy to work with.

Ideally, you will find a partner with a skill set complementary to yours.

For example, if you excel at home improvements and maintenance.

Try finding a partner who is skilled with crunching numbers.

• Set up your partnership with an operating agreement that lays out responsibilities, contributions, and the division of returns.
• Having a partner can give you the ability to more easily qualify for a mortgage.

Invest in Rental Real Estate

6. Find an ideal rental market.

Look for a local rental market that is excellent with high demand for rental homes.

The tenant pool should be made up of people who have made financial mistakes in the past and cannot qualify to buy.

There may also be many people who have lost their homes in foreclosure.

The market should have experienced an increase in prices over the past year.

• Ideally, you should invest somewhere close to home that you are already familiar with.
• Otherwise, you will need to do a lot of in-depth research.

7. Start with one, small property.

Even if you have the money, you shouldn’t jump in to real estate investing with a larger or complex property.

Large properties like shopping centers or condominiums may have more complicated requirements or need larger down payments.

Instead, start with a single-family home that is well within your budget.

This will allow you to become accustomed to being a landlord and the bookkeeping required of you.

You can then move up when you become more experienced.

• Locate properties by searching online for listings at websites like Realtor.com, Redfin.com, Zillow.com, and Trulia.com.
• You can also use a realtor who works with investors.
• Large rental units like 2 and 3 bedroom units require more maintenance than smaller units, and although realtors describe these properties as, “Bread and Buffer Units”, they are overwhelming, “Nightmare” properties to most first time owners.
• Small rental units like Studios, Bachelors and Singles tend to rent to people that do not have much furniture and can move around a lot. Small rental units, although, “low key”, will have a lot of vacancies and you will have to budget for this before you buy the property.

8. Invest in commercial properties.

Commercial properties offer larger potential returns than residential properties.

However, finding and investing in them is significantly more difficult and should only be done by experienced real estate investors.

To purchase commercial real estate, you will need to evaluate the property based on cost and potential returns from renters.

You’ll also usually need at least a 30 percent down payment to qualify for a loan.

• If possible, look for motivated sellers (those who need to make a sale quickly for various reasons).
• This is your opportunity to purchase a property for a lower-than-market price.

9. Evaluate return potential.

Your main focus should be on your potential return on the property.

Which is the rent you receive minus any expenses.

This will depend on the prevailing rent in the area and the specific qualities of the home that might allow you to charge more or less rent.

Ask the current owner of the property for financial information regarding the property, particularly if they have been renting it out. Assess the following:

• The mortgage payment you will be paying.
• The current rent, rent charged for similar properties in the area, and any historical rent increases.
• The strength of the rental history. Does it stay empty for long when tenants move out?
• Average expenses for the property.
• The current owner’s profits or losses over the past few years.
• Your ability to earn a return based on this information. Remember: rent – expenses = your return.
• Maintenance expenses can be estimated at 5 percent of gross rental income. Down-time expenses and larger repairs account for another 5 percent.

10. Assess the property’s location.

The location is perhaps the most important feature of a rental home for renters.

A good location can also allow you to more easily fill the property and can justify higher rent rates.

Better tenants will seek out these properties and provide you with more reliable rent payments and fewer difficulties. Specifically, look for properties that:

• Are near good schools.
• Are in low-crime areas.
• Are convenient to shopping and amenities.

Invest in Rental Real Estate

11. Make sure you’re getting a deal.

Look for those properties that are at, or near the bottom, and especially at homes selling below what it would cost to build them.

If prices are low and interest rates are too, that combination makes buying ideal and probably a once in a lifetime opportunity.

Talk to local real estate agents and hire an appraiser to ascertain whether or not you are getting a good value.

• Many rental property experts swear by the 1 percent rule. The rule is that the property’s monthly rent should be at least equal to 1 percent of the property’s value.
• In the longer term, you should look for properties that you can pay for in full in 10 to 15 years, based on your rental earnings.

12. Make an offer.

Work with your realtor or the selling agent to put in an offer when you’ve found a good property.

Have a number in mind and come in lower than your number if possible.

Make sure not to let emotion cloud your judgment and only buy a property if the price is right.

You can always walk away if you and the seller cannot come to a beneficial agreement.

13. Perform due diligence.

With your offer accepted, you now have until the closing date to make sure that there is nothing wrong with the house and to get your financing in order.

Have a home inspector look for any issues with the property.

If there are serious problems, you may be able to renegotiate the selling price.

Make sure that the current owner didn’t just put off certain repairs that you will have to do later.

14. Obtain insurance.

Before you rent your property out to tenants, it is advisable that you get landlord’s insurance.

All of the major insurance providers offer this type of coverage under different names, but generally separate coverage into three categories, from the minimal DP-1 to the all-inclusive DP-3 (DP stands for “dwelling policy”). Most insurance professional recommend that landlords get DP-3 coverage to protect themselves from unexpected tenant behavior.

• This type of coverage generally provides replacement costs for losses, rather than cash value, which can be beneficial in the event of expensive damages.
• You should make sure that your coverage also includes general liability coverage. This provides coverage for any injuries sustained on your property. Experts advise that you get $1 million in liability coverage.
• The cost of landlord’s policies depend on the location and size of the property. However, the average is about $800 to $1,200 per year.

Invest in Rental Real Estate

15. Determine an appropriate rent.

Talk with local real estate agents and research similar properties online in order to determine a reasonable rent amount.

Make sure that, at minimum, your rent covers 110 percent of your mortgage payment on the property.

The ten percent buffer can be used to cover maintenance, down time, and large repairs.

Any amount you earn over that is profit.

16. Market your rental property.

Start by listing your property on websites like Craigslist, Trulia, and Zillow.

Make sure to include plenty of high-quality and well-lit pictures.

Fill out the listing will as much information as you can.

You can also purchase an advertisement in the newspaper, though this is expensive and may be ineffective.

Finally, try placing a “for rent” sign in the front yard of the property.

In all cases, provide a way for interested renters to contact you, either by phone or email.

Invest in Rental Real Estate

17. Screen applicants.

You will have to screen your potential tenants thoroughly for credit and criminal issues.

It will cost you some money but will save you from potentially devastating losses.

There are rental owners who don’t do their due diligence and end up with scam artists who stop paying as soon as they have possession and do tremendous damage to the home.

A bad tenant can end up costing you thousands in repairs, even if they do pay their rent on time.

• Look for applicants who are employed and make at least three times as much as the monthly rent.
• Reject any applicants with lengthy criminal records or those with credit scores under 650. Your specific requirements here depend on your risk tolerance and the strength of the market.
• Keep good tenants if you can by promising to keep rent steady or simply by providing excellent service.

18. Draft a rental agreement.

Find a rental agreement template online and use that to create your own with all of the relevant property details.

You may also consider hiring a lawyer who has experience in the industry to make sure that your rental agreement doesn’t leave anything out or include any strange provisions.

The rental agreement should specify the rental period, the responsibilities of both you and the renters, and the security deposit.

The security deposit is usually one month’s rent, but may be subject to state or local limits.

Invest in Rental Real Estate

19. Make sure to collect rent.