Real estate is one of the most stable assets in which you can invest. Since everyone will always need a place to live, this market never goes out of style.
However, getting started with real estate investment can be highly complex. From the diversity of investment products you can buy — ranging from stock purchasing to Real Estate Investment Trusts (REITs) — to various types of properties, you have a lot to consider.
Rental units are one great way to see the ins and outs of real estate investment and get started on your investment journey. Here, we’ll explore how to search, where to obtain financing, and how you can manage your first rental property.
Starting the Search
First, it is important to understand that investing in a rental property is never a guarantee of a return on investment (ROI). Like virtually every other investment type there are risks as well as rewards waiting for you from a rental property.
That's why it is so essential to properly plan before you make your investment. Start your search by calculating an estimated ROI depending on your budget and how much you want to invest.
Your ROI is the net profit you're going to gain for managing a successful rental unit. For example, if your monthly expenses on your rental unit are $2,000 and you make a net gain of $500 per month on rental income, then your ROI will be 25% on a monthly basis.
Of course, a lot more goes into calculating your exact expenditures and corresponding obligations. From closing costs to taxes, you’ll need to build a thorough budget.
From there, it will be a matter of narrowing your search to fit your needs.
Here’s what you want to look for when searching for a great single-family home or apartment complex:
Neighborhoods with appreciating home values
Low crime rates
Great schools
High employment rates
These factors mean a higher probability of a positive cash flow from a rental property. Examine your opportunities and calculate appropriate estimates. Your monthly income will depend on your mortgage payment, ongoing maintenance, property management costs, and all other associated costs.
Use the 1% rule to simply gauge the effectiveness of your deal. Your overall property purchase price divided by your monthly income should land at least in the 1% range if your property is to make for a successful investment.
However, you will also need to account for vacancies and emergencies. Calculate your annual expected income with a decent amount — say 5% of your income — reserved for unexpected expenses. If you can still make around 1% of your purchase price per month accounting for this savings, then you may have found a great investment.
Obtaining Financing
Few investors have a massive pool of cash with which to begin their real estate journey. That’s why finding the right financing is an absolute must.
Start with a complete list of all the expenses you will need to account for. Here are some of the important and easily forgotten items to include in this budget:
Broker fees
Agent commissions
Closing costs
Maintenance and cleaning
Insurance
Marketing
Travel and time
Tax prep
Legal fees
...and the list goes on.
Rental properties are complex and require shelling out money for all kinds of services needed to maintain and rent the place. If you don’t have an accurate estimate from the beginning of what managing your investment will cost, you won’t be able to get the financing you need.
Once you have your budget estimate locked down, you can seek out the proper loan product. Most investors will need to put at least 20% down on a rental property. From there, you can explore your financing options.
Traditional bank financing is common for investors looking to break into the rental market. However, you can also explore seller or owner financing, in which the owner of the property takes the place of the lender and you make your monthly payments directly to them rather than a financial institution. This can save you money on bank fees and interest rates but not every seller will be open to it.
Additionally, you can explore using your home equity or even crowdfunding real estate investment opportunities to obtain the resources you need.
Managing Your First Rental
With your budgets and ROI estimations made, financing obtained, and your ideal property found, your next task is to effectively manage your investment to maximize your returns. This means answering maintenance needs, mitigating vacancies, and screening for the best tenants.
Fortunately, you don’t need to be alone in this endeavor. Property management companies are out there that can help you cultivate your investment for maximum success. For a minimal fee, experts in tenant and property management can help you keep your rental full of the best possible tenants and take the stress of maintenance of upkeep and rent collection off your hands.
Property management companies are highly valuable — especially for new investors.
Begin your rental property investment with advice from finance and tax professionals. With proper budgeting, you’ll be able to find the right property and financing options for you. Then, consider a proven property management company to boost the potential of your first rental.
For more information on real estate investment and property management, contact 208.properties or find us on social media.