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Rental property investing is one of the most common ways to get started with real estate investing-most experts recommend getting your first deal under your belt as quickly as possible.
When you’re new to real estate investing, it’s best to start off slow by buying a single unit and renting it out.
If you’ve never done it before, or don’t know where to start, this article will help guide you through the process. It’s easier than most people think and can be a great way to build wealth for yourself in real estate without putting all your eggs in one basket.
In this article, we’re going to look at how you can get started with your first rental property and some tips for getting it rented out quickly so you can build up your portfolio.
When people think of real estate investment, they often picture buying and selling homes-but rentals are another great way to invest in the housing market that’s more accessible than most people realize. Rental properties are the most common entry-level investment in real estate for beginner investors.
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How To Start A Rental Property Business
If you already own a property, the best way to get started with rental property investing is to rent out a room (or a couple of rooms) from within your existing property.
You can either accept short-term rentals through Airbnb and HomeAway or you can accept long-term tenants.
This strategy is more popularly known as “house hacking”.
If you don’t own property yet and you want to get started with a rental property business, the best way to get started, of course, is by taking the first step to homeownership.
In most countries, you would only need to make a 5% down payment on your primary home, and since you don’t have a home to your name yet, you can buy your first rental property as your primary residence, then rent out either the basement (if your home has one) or rooms that you don’t use yourself.
This is very doable, especially if you’re single and you don’t actually need multiple rooms.
A better alternative to house hacking is to buy a multi-family like a duplex, triplex or fourplex for your first property. This gives you the leverage of being able to rent out multiple units in one shot.
How To Find Your First Rental Property
So how do you find these properties?
Well, there are different strategies you can use.
You could go to a real estate agent and ask them for leads of rental properties in your area that meet your criteria (e.g.: location, size).
Or if you want more specific leads on what’s available and where it is located (to avoid wasting time touring dozens of empty homes), then you could use a real estate investment website that specializes in helping investors find properties.
There are many such websites and most of them offer free trial memberships so you can see which is the best fit for your needs, but some of the more popular ones include:
- RealtyShares
- BiggerPockets Real Estate Marketplace
- Wealthy Nest
You can also start by looking for properties listed on Craigslist, Zillow, or Trulia.
If there are any houses around your neighborhood that have been foreclosed and/or abandoned, then those are definitely good places to look.
Renting Out Your Rental Property
Once you acquired your first rental property, it may or may not need a renovation. If it’s ready to be rented, the obvious next step is, of course, to rent out your property.
You should work out what kind of tenant you need for the property you have chosen.
For instance, if you want to attract and retain students for your student rental property, then you should make this clear on the ad or listing.
If there are specific amenities that would be especially attractive (e.g.: a swimming pool), then those could also go on the listings as well as any other features that might be relevant.
You should also work on how to attract students and tenants in general.
For student rentals, this is especially simple: you can place the ad for your property at a university near where you live (if it’s not too far away). This will get potential tenants from that area automatically.
If you’re looking for any other type of tenant, then you should focus your efforts on places where they’re likely to be found (e.g.: if you’re looking for corporate renters, post the listing near an office park).
If you’re not too confident in offering a long-term lease, you can consider letting out your unit(s) as short-term rentals (STR) by signing up on websites like Airbnb and HomeAway.
You have to understand, however, that short-term rentals are a more involved venture, which turns your rental property business into an active business instead of a passive one but it could also lead to higher potential earnings, especially if you’re in a highly-visited location.
Yet another option is leasing out the whole property to couples or families as long as a long-term rental, which in most cases, is more passive.
Property Management
One of the most difficult parts of traditional rental property investing is property management, so make it a point that you only rent out to highly qualified tenants to avoid the headaches of property management.
Property management is the act of overseeing residential and commercial properties. It includes looking after vacant properties, renting out, collecting rents, dealing with tenants, checking that the maintenance of the property is up to standard, etc.
The responsibility of property management can be delegated to an outside agency or company. This ensures that there is someone to oversee all aspects of the rental property which can include finding tenants and even collecting rents. Property management companies are usually hired by landlords who may not reside in the same town or country where their rental properties are located.
Self-Management
If you want to manage your rental business on your own, then here are some pointers that will help you with the process:
– Get good tenants as quickly as possible – If they have pets, ask them if there’s any damage or wear and tear caused by it before renting out to avoid problems later on down the line – Ask tenants to provide a credit report from one of the three major consumer reporting companies (see links below)
– Make sure you have proof that they can afford your rent price and aren’t trying to pull a fast one on you. The best way is by having them pay the first month’s rent, last month’s rent, and a security deposit upfront.
– Consider hiring an eviction lawyer if you have to evict tenants due to nonpayment of rent or other breaches in your lease because it can be expensive, time-consuming, and unpredictable – Make sure that the property is always well maintained so that you don’t lose money on repairs or maintenance costs.
There are many online resources that can help you with choosing a good tenant, including SmartMove and Rentler (both offer free trials).
You can also ask your tenant for a credit report, which is one of the most important things to do before renting out.
You should always run a background check on all potential tenants and don’t just take them at their word that they’re good renters because you could be setting yourself up for disaster if you do that.
There are three major consumer reporting companies that you can get a credit report from:
Equifax – 800-685-1111 Experian – 850-203-4099 TransUnion – 800.916.8800
Once the tenant has been approved for tenancy, make sure to clearly outline all rules and regulations in writing along with the responsibilities of the tenant to avoid any issues later on down the line.
Hiring A Property Management Company
Choosing a property management company can also help take the burden of managing your investment off your shoulders, but be careful because some companies charge high commissions or monthly fees that might eat into potential profits from renting out the property.
Property Management Fees Property management fees vary from company to company depending on several factors such as location, size of the property, etc., but it usually ranges between 15-20% of monthly rent.
Hiring a property management company is usually cheaper than hiring a full-time property manager, but you should also factor in the cost of other fees such as administrative costs and late fees if your tenant is not paying rent on time.
The best way to find out which company offers the cheapest fee structure for managing your rental property business would be by comparing quotes from multiple companies or simply asking them for a breakdown of fees.
Cash-out Refinance to Buy Your Next Property
Now that you’ve got your first rental property investment in operations, the next step is to acquire your next rental property. In a perfect world, you would have the cash to buy your next property or if you live in a location where you can buy rundowns or foreclosures for cheap. Buy and pay in cash, renovate the unit then refi.
Traditionally, you would have to apply for another mortgage to acquire your next property, in this case, you can wait until you have enough equity from your existing property to take out a cash-out refinance loan. The idea of taking out this kind of loan is to be able to buy another property with no money down.
The usual amount used for buying another house using a cash-out refi would depend on how much equity you have in your existing property.
Since lenders like to see at least 20% equity before approving a cash-out refinance loan, you would want to aim for having the value of your home go up at least that much or more (depending on how high-interest rates are) so it makes sense to do this strategy when prices are rising and there is a lot of demand for rental properties.
Conclusion
In conclusion, starting a rental property business need not be difficult.
You can start a rental property business by simply renting out rooms or a basement on your existing property or buying your first property and renting out part of it.
If you don’t own a property already, you may qualify for a low down payment of usually 5%, instead of the usual 20% required down payment for investment properties in most countries.
While the cash flow from a rental property unit will not replace your full-time income right away, real estate is still one of the best ways to build wealth for the long term.
The best way to start a rental property business is by starting with one property. If you already have one, rent out part of your existing property. If you don’t own any property yet, start by saving for your first property, then rent out part of it.
Once you accumulate enough equity in your home, you can apply for a mortgage refinance, then transfer the equity to your next property.
Rinse and repeat to slowly build your rental property portfolio.
