How to Start Your Investment Journey While You're Still a Tenant

Real estate investment can provide significant long-term returns and passive income, making it an attractive option for investors of all different backgrounds. While investing can seem daunting, especially while renting, being a renter doesn’t mean you can’t start investing. There’s a lot that you can do ahead of time to learn about investing and get yourself into a good position to invest.   

In this article, we’ll explore some tips and strategies for tenants who want to begin investing in real estate. We’ll cover the benefits of real estate investing, important factors to consider before investing, financing options, tips for finding investment properties, and more. By the end of this article, you’ll better understand how to start your investment journey as a renter.

What Is an Investment Property?

An investment property is a real estate property that is purchased with the intention of earning a return on investment. How does this work? An investor purchases the investment property using cash, a mortgage, or other forms of financing. The investor then rents out the property, generating rental income. The primary ways that investors earn money from investment properties is through rental income and property appreciation. The rental income can be used to cover the costs of the property, such as mortgage payments, property taxes, and maintenance expenses, and any remaining income is the investor’s profit.

Over time, the property’s value may increase as property improvements are made or changing market conditions. The price can also go up due to inflation. Should the investor decide to sell the property, they can profit from the difference between the sale and purchase price. Investors can also use different strategies to maximize their returns, such as renovating the property to increase its value, buying properties in up-and-coming areas, and managing the property effectively to reduce costs.

Owning an investment property requires time, money, and ongoing maintenance. That is why it’s advisable for investors to set aside 1% of their property’s value for repairs. You can also use a property management company to handle maintenance, tenant screening, and rent collection. Landlords must also know landlord-tenant laws on security deposits, lease requirements, eviction rules, and fair housing laws. 

Benefits of Investing in Real Estate

• Potential long-term returns: One of the key benefits of investing in real estate is the potential for long-term returns. Property values, in most markets, tend to appreciate over time, and this can provide a significant return on investment for investors who hold onto their properties for an extended period of time. In addition, rental income provides a steady stream of cash flow for investors.

• Passive income: Another benefit of investing in real estate is passive income. Rental properties can generate ongoing income for investors, which can be especially attractive for those looking to build a steady stream of passive income over time.

• Portfolio diversification: Real estate investing can be a great way to diversify an investment portfolio. By adding real estate to an investment portfolio, investors can reduce risk and create a more balanced portfolio.

How to Evaluate Potential Rental Properties

Carefully evaluating potential rental properties is critical to making solid investment decisions and maximizing your potential returns. Here are some points to consider as you look at potential rental properties:

• Location and Neighborhood: One of the most important factors to consider when evaluating a potential property is its location and neighborhood. Look for areas with a high demand for rental properties, such as near universities, employment opportunities, or popular tourist destinations. Consider factors like access to amenities, jobs, and the quality of local schools. Additionally, consider the crime rate and safety of the neighborhood as well.

• Property Condition and Maintenance Requirements: The condition of the property is another important factor to consider when evaluating potential rental properties. Assess the age and condition of major systems like the roof, HVAC system, and plumbing, as well as the condition of interior finishes like flooring, cabinets, and appliances. Estimate the cost of any necessary repairs or updates, and factor those into your budget for the property.

• Rental Income Potential and Expenses: To determine the potential profitability of a rental property, you’ll need to estimate the amount of rental income it can generate and the expenses associated with owning and maintaining the property. Look at similar rental properties in the area to determine a competitive rental price and estimate the amount of time the property will be vacant between tenants. Additionally, consider expenses like property taxes, insurance, HOA fees, property management fees (if applicable), and maintenance costs. 

• Valuation of the Property: Assess the value of the property based on factors such as location, condition, size, amenities, and comparable properties in the area. This will help you determine if the property is a good investment opportunity.

• Investment Purpose and Investment Horizon: Consider your investment goals and the length of time you plan to hold the property. This will help you determine the appropriate investment strategy and whether the property fits your portfolio.

• Expected Cash Flows and Profit Opportunities: Analyze the potential cash flows and profit opportunities associated with the property. This includes estimating the rental income, operating expenses, taxes, and potential appreciation.

• Your Credit Score: Your credit score will impact your ability to secure financing for the property, and may also impact the interest rate that you qualify for.

Read How to Generate Better Returns With Rental Properties to discover new ways to increase your ROI.

Financing Options for Your Investment Properties 

Financing your investment doesn’t have to be an obstacle if you know where to look for the money to take advantage of an investment opportunity. 

Here’s a look at some of the more popular forms of financing:

1. Conventional Mortgages

Conventional mortgages are one of the most common financing options for rental property investors. Banks and other financial institutions typically offer these loans and they work similarly to a mortgage for a primary residence. Investors can obtain a loan to finance the purchase of a property, and they will need to make regular payments of principal and interest until the loan is paid off.

Pros:

• Lower interest rates compared to other financing options like hard money loans

• Longer repayment terms can help to keep monthly payments lower

• Opportunity to build equity in the property over time

Cons:

• Strict qualification requirements, including a high credit score, stable income, and a down payment (often, at least 20%)

• Longer application process compared to other financing options

• It may require additional paperwork and documentation compared to other financing options

• Limited flexibility in terms of repayment options

2. Private Money Lenders

Private money lenders are individuals or small groups who lend money for real estate investments. These lenders may be more flexible in terms of lending requirements and may be able to provide funds more quickly than traditional mortgage lenders.

Pros:

• More flexible lending requirements

• Faster approval process and access to funds

• May be able to obtain funding for properties that don’t qualify for traditional mortgage loans

Cons:

• May have higher interest rates and fees compared to traditional mortgage loans

• Limited legal protection for investors in case of default

• It may require a personal guarantee or collateral for the loan

3. Hard Money Loans

Hard money loans are typically used for short-term investments, such as property flipping, and may come with high-interest rates and fees. These loans are based more on the value of the property than on the borrower’s creditworthiness.

Pros:

• Fast approval process and access to funds

• Ability to obtain funding for properties that don’t qualify for traditional mortgage loans

• Often these loans have no income or credit requirements for the borrower

Cons:

• High-interest rates and fees compared to traditional mortgage loans

• Short repayment terms, typically between 6-18 months

• Higher risk of default for the borrower

See: 10 Loan Options When Purchasing an Investment Property. 

How to Manage Rental Properties

Managing rental properties involves a number of different tasks, including finding and screening tenants, setting rent prices and lease agreements, and maintaining the property. Depending on the investor’s experience and availability, they may choose to manage the property themselves or outsource to a property management company. 

Here are some key steps to consider when managing rental property:

1. Set clear rental policies: Establish clear and consistent rental policies to ensure that tenants understand the rules and expectations. This includes policies on rent payments, maintenance requests, and tenant responsibilities.
   
   

2. Screen tenants carefully: Screen potential tenants carefully to ensure that they are responsible, reliable, and have a good rental history. This can include conducting background checks, reviewing credit reports, and contacting references.
   
   

3. Maintain the property: Regular maintenance of the property is essential to ensure that it remains in good condition and that tenants are satisfied. This includes addressing repairs promptly, conducting routine inspections, and keeping the property clean and well-maintained.
   
   

4. Communicate effectively: Effective communication with tenants is key to maintaining a positive relationship and resolving issues quickly. Establish regular communication channels and respond promptly to tenant requests or concerns.
   
   

5. Keep accurate records: Accurate record-keeping is essential for managing rental property effectively. Keep detailed records of rent payments, maintenance requests, and any other relevant information.
   
   

6. Enforce lease agreements: Enforce lease agreements consistently and fairly to ensure that tenants understand the consequences of violating the terms of the agreement.
   
   

7. Plan for the unexpected: Plan for the unexpected by setting aside funds for unexpected repairs or vacancies. This will help ensure that you can manage unforeseen circumstances.
   
   

8. Consider outsourcing to a property management company: Consider outsourcing the management of your rental property to a property management company. This can help reduce the workload and stress associated with managing the property while also ensuring that it is managed professionally. See: 11 Benefits of Outsourcing Property Management. 

Tips for Successfully Investing In Rental Property 

While rental property investing can be a great way to build wealth, it requires a lot of hard work and dedication; especially if you’re planning to manage your own properties.

Here are some tips for success:

1. Build a strong network of professionals. Investors should build a team of professionals, including real estate agents, property managers, attorneys, accountants, and contractors. These professionals can provide guidance and support throughout the investing process.

2. Stay organized with finances and documentation. Keeping accurate financial records and documentation is essential for rental property investing. Investors should establish a system for tracking income, expenses, and receipts to stay on top of their finances.

3. Continuously educate yourself on investing and property management. Real estate markets and laws are constantly evolving, so it’s important for investors to educate themselves on the latest trends and regulations continuously. 

Rental property investing can be a great way to build wealth and achieve financial freedom. Investing in rental properties can allow you to generate passive income, build equity, and take advantage of tax benefits. It’s important for investors to understand the potential risks and legal considerations and to take steps to ensure success, such as building a strong network, staying organized with finances and documentation, and continuously educating yourself. If you’re considering getting started with rental property investing, take the first step and start researching properties in your area.

Are you ready to take the first step toward investing? Claim your FREE guide today to learn How to Find and Buy the Perfect Investment Property and ensure that it generates the returns you’re looking for. Start your investment journey now and build your wealth with rental investments.