Investing in Rental Properties for Beginners

An excellent way to make a side income is by investing in rental property. When this method is used correctly, it can provide the owner with a continual residual income. While some further investment and upkeep will be necessary, it can be a win-win situation.

Know the Costs

There are going to be many expenses associated with investing in rental property. This will include items such as taxes, utilities, insurance, legal fees, inspections, advertising for new tenants, appliance repair and replacement, etc. No matter how carefully you think you understand the costs, realize that there may still be some surprises.

Investigate Before Buying

One of the biggest ways to stay out of trouble with a rental investment is to be sure to perform a careful investigation of the property prior to buying. Sellers may not be willing to reveal everything, so it may take some digging, as well as cost, to get the dirty details.

Be sure to also understand the cost of service people in the area. Obtaining the services of a carpenter, a furnace repairman, a plumber, a painter, or a roofer, may be more costly than you think. It would be a good idea to get estimates on repairs that you are aware of before you buy. This will also put you in a better position to bargain from when buying.

Some things that you must find out before buying a rental property, or when investing in vacation rental, include the prices of similar homes in the area. You also will need to know the current rental prices you can expect to receive, based on what similar homes are being rented for now. This is most important if it is a single family dwelling because the rent from that one home must be enough to ensure you can still earn a profit.

Find out, too, whether the trend of housing values are going up or down in the area. Understanding if there are plans for new housing projects, parks, shopping centers, golf clubs, etc., in the next five years or so can quickly raise the value of a rental investment.

Multi-Family Rental Homes

You can be sure that you could make considerably more money with a home that can house two to four, or more families. However, there will also be more repairs to make, and you need to allow for possible vacancies over a several month period.

Consider the Area Carefully

When you choose an excellent area, it means that people will always be looking to rent there. Look for quality rental property near shopping centers, schools, major roads, and public transportation. Another prime location is to choose a property near a larger college campus. Students and staff will be looking for places to rent, especially during the school’s calendar year. On the other hand, be aware that an increasing amount of crime can cause home values to plummet.

Managing the Property

When investing in rental property, the owner needs to decide beforehand whether or not he or she will manage it themselves. This may depend on whether or not the owner lives near the property, and whether they want to be directly responsible to mow the lawn, repair appliances, make the apartments ready for new tenants when one moves out, etc.

If you are looking at multi-family properties for a rental investment, you will certainly get a larger profit, but it will likely place greater stress on you. It may mean, on occasion, getting up in the middle of the night to take care of urgent problems that can occur with plumbing, power, noisy neighbors, and broken appliances.

Investing in a local property has its advantages. It gives you the opportunity to check on the property from time to time, and to ensure that the manager is doing the job you want. If the property becomes seriously damaged during a storm, you are right there to ensure everything is done properly to protect the undamaged portion.

Hiring an experienced manager also has some benefits. Although it will mean less profit for you, you can learn from the manager – and then decide later if you want to handle it yourself.

Know the Property’s Value

Many new investors in rental properties make the mistake of overestimating two things. They overestimate the value of the property, and then they overestimate how much income there will be each month from it – after the bills are paid. Things like vacancies, maintenance, and the cost of evictions, are often higher than anticipated. Having to buy special insurance to cover the possibility of natural disasters within an area may be another expense you need to be aware of before investing or buying vactation rental.

Buy Less than Market Value

New investors need to buy at what is considered less than market value. It is a mistake to buy a property for investing, or to consider investing in vacation rental, at market value. When you do this, even slight changes in the market can mean you go into debt, and possibly even broke.

Investing in Vacation Rental

Putting your money into buying vactation rental property may be even more risky. It is quite likely that it may be vacant much of the year, depending on your location. This needs to be calculated carefully by talking to the previous owner, and you need to understand what kinds of people are likely to rent it. If you are buying vactation rental where the renters are apt to be college kids who love to party and get drunk, you can count on some damage.

In order to make money on a vacation rental, you would have to be able to rent it out so many days and weeks of the year. The IRS does not give people who own a second home the same tax breaks as you would get on a primary residence. You would need to calculate how much you could realistically expect in income, and then subtract your anticipated expenses, to determine if there will be a profit. You can only consider it to be a valid way to invest if you and your family spend less than two weeks in it each year.

Use Other People’s Money

It is not necessary to use much of your own money in this business. There are many other sources that are willing to help you. Keep your own personal investment at a minimum, but be sure to keep additional money available for unforeseen repairs or events.

A Short Opportunity for Investing

Before you ever decide to invest, be sure that you have a good idea of what you are getting yourself into. Read books, talk to other investors, read what’s online about it. The more you know the better – and the safer your investment money will be.

After you think you know enough and are ready to start looking for investment properties, you need to know how to make quick decisions about a property. If it is a potentially good property, you can be sure that other investors have also likely seen the ad, and your window of opportunity may be short – a week or two at most if they already have their financing lined up.

Develop an Exit Strategy

It just makes good sense to be prepared if the project does not work out as planned. You not only need a cut-off point at which your debts get too big (actually before they do), but you need to have a solid plan on how to get rid of the rental property. You may consider refinancing, selling it retail or wholesale, a lease option, or seller finance.

Investing in various rental properties can certainly be a great way to produce a second income – or you can even make it your sole income after a while. The primary concern is to understand best solution that works for you and your investment portfolio.

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