A Beginner’s Guide to Investing in Rental Property
Those who may be new to the world of real estate investment may balk at the amount of hard work and dedication it takes to work with real estate properties. So for a person who is interested in becoming a real estate investor, starting out with rental properties is a sound idea.
One of the reasons why investing in rental properties is a good place to start with is that tenants can help with covering costs through their monthly fees. Apart from this, rental property investors are also eligible to receive a number of tax deductions and write-offs due to the fact that they own real estate.
So although rental properties are a good starting point in real estate investment, there are still a few things that you may need to know if you do plan on investing in rental properties.
Residential vs. Commercial
Rental properties can be classified into two types: residential rental properties and commercial rental properties. Residential properties are leased or rented to a smaller number of tenants (e.g. single-family homes, duplexes, or triplexes) while commercial rental properties are spaces that get rented out to a larger number of tenants (e.g. apartment complexes, warehouses, or office spaces).
It’s often recommended for beginners to start with a residential rental property. They’re less expensive than commercial spaces, and it’s easier to get financial assistance through a home buyer loan or a mortgage. Also, it’s easier for a beginner to manage a smaller number of tenants for a residential rental property than a commercial rental property.
Where to Invest
One of the biggest challenges beginner investors face is where to purchase a piece of real estate to rent out. A common mistake beginners make is investing in their own area without considering the numbers, since it would be easier to manage given the proximity.
The decision of where to buy or build real estate in needs to consider the following criteria:
- the demand for rental properties in the area
- the economic situation such as employment rates
- job growth
- the population and the demographic makeup of the area
- the average price for homes in the area
- the average rental price
Crunch the Numbers
Purchasing a rental property takes considerable funds, unless you have considered crowdfunding real estate ventures that allow you to invest in real estate online. That’s why in order to determine the potential monthly cash flow, you need to sit down and take a look at the costs you will be incurring.
In order to calculate the numbers, you will need to know the rent you’ll be collecting, as well as the costs that will be incurred, like the taxes, property maintenance fees, and of course the insurance fees (you can figure this out ahead of time from Allstate home insurance quotes or any other insurance companies). Bear in mind that there’s a chance that your property may not immediately produce the returns you initially project.
Choosing a Tenant
Last but not least is finding a tenant. Finding the right tenant is important since it can spell the difference between a tenant who helps take care of your property and pays the rent on time or someone who is always late with their dues and has little regard for property maintenance.
You can use online services like Turbo Tenant, but you may want to conduct a screening process yourself and check a few things like their income, work history, criminal history, and even verify their previous rental history. If they do not meet your requirements, you can decline renting your property out to them.
Investing in real estate can be a great way to earn passive income, but it can be a lot of hard work. By following the above guide, beginners can jumpstart their way to earning money through rental properties.