Real estate is responsible for helping many of the world’s wealthiest people to grow their fortunes. And rental property can be a tremendously valuable investment. But as is the case with any investment, when it comes to real estate, not all investments are created equal.
Finding success with real estate is dependent on three things: scouting out a promising property that’ll perform well as a rental, securing a good deal, and finally, how well that property is managed.
Whether you’re just getting started with real estate investing, or you’re looking to grow your portfolio, it pays to learn from the best. Learning from other investors who have been there, done that –and taken the time to share their knowledge can help you to sidestep many common pitfalls and mistakes that often befall first-time, and even experienced investors.
See also: Landlords: Learning From the Mistakes of Others.
With this in mind, here’s a look at some inside tips for rental property success. Read on to see what you should know before you begin.
Set Big-Picture Goals
Before you begin, it’s important that you narrow in on your goals. Start by setting parameters and guidelines and answer for yourself why you are investing. What do you hope to gain from it? What are your end goals? By outlining these things in advance, you will better be able to narrow down what type of property you want, how many properties you’ll want to invest in, and how much you need to make from each property.
Some experts also recommend tying your investments with a specific life goal. This can help to keep you on track and will give you a clear idea about exactly what type of investments you need.
“I like talking to people about the idea of linking their investment strategy and every individual property in the investment portfolio with very specific objectives in their life that matter to them that are way out,” said Greg Rand, Chief Strategy Officer at Renters Warehouse in a Renters Warehouse podcast.
Connecting each property to important long-term objectives in your life will help to keep you moving forward toward your investment goals. So one property could pay for a child’s college education, or maybe five properties could support you in retirement. Again, get specific. Tie it to your retirement date and your specific income goals so you have something solid to work toward.
Consider Making a Big Down Payment
While there are some investors who recommend getting started with little money down, according to many real estate experts, for those who can make it, a bigger down payment is ideal.
“Making a 30% down payment is ideal,” said Rand. We’ve all heard horror stories of underwater mortgages, and everyone’s afraid to buy during a bubble. But a sizable down payment will help to remove a great deal of risk out of the equation, helping to protect you from any temporary downturns in the housing market. A large down payment will also help you to qualify for a better interest rate. This is one of those things that you can start working towards now. Start saving and start researching so that when it’s the right time to buy, you’ll be ready to.
Look Into Financing Options Early On
Next up, make sure you’ve looked into your financing options and have a plan for funding. Unless you’re planning on paying for the property in cash, you’ll want to make sure you work to become a stronger borrower. This means working on your credit score, ideally, you’ll want to have a good score if you want to qualify for the best loan terms possible. You’ll also want to start saving up for a down payment, and enough to cover any unexpected costs at the time of closing and build up an emergency fund in case of any unexpected repairs, or if the property doesn’t rent right away. Once you’re ready to apply for a mortgage, you’ll also want to consider getting preapproved for a loan. This will help you to move quickly when you find a prospective property, and will also inform you exactly how much you’ll qualify for, helping you to narrow your property search and ensuring that you don’t waste time with properties that are out of your price range.
Run the Numbers
Next up, you’ll want to make sure the property you invest in will generate decent returns that are in line with your investment criteria. One general rule that some experts run is the 1% rule.
“There are many ways to evaluate investment returns when purchasing an income property. As a general rule of thumb, I always advise my clients to use the 1% rule as an investment strategy,” advises Alex Chieng with A & L Real Estate Team. “The 1% rule states that the income property should rent for at least 1% of the purchase price to yield positive cash flow. The due diligence would be analyzing the fair market rental rates in the area.”
Once a property checks out with the 1% rule, it’s a good sign that it’s worth considering further. Other numbers you’ll want to run include cash flow, cap rate, and cash on cash returns.
Look for Properties That Have Been on the Market for a While
Looking to purchase a property that’s at or below market value is always your best bet. And you may be able to negotiate your way into a better deal, even during a seller’s market. One strategy is to look for properties that have been on the market for a while, at least a month. These sellers might be more motivated to sell. Also consider value-add properties, rentals that may require some work to get them into rent-worthy shape.
“The condition of the property along with how it has been presented will usually dictate if the property can be purchased at a discount,” said Engelo Rumora, founder of List’n Sell Realty. “So if the property doesn’t have online photos then it likely has zero curb appeal. It also means that a significant discount can be requested on the purchase price and that the listing agent doesn’t have much to work with and could just be after a quick sale.”
Try to Secure an Inspection Contingency
Before closing on a property, it’s a good idea to work to secure an inspection contingency. With this contingency, you’ll be able to wait until the inspections come in before you close the deal, which is vital for protecting yourself in case the property isn’t everything it appeared to be in the listing.
In addition to a general home inspection, there are several other inspections that you’ll want to consider having as well, such as an inspection for mold or pest damage.
With an inspection contingency, you’ll be able to negotiate with the sellers on repairs once the inspections come in. And if you feel that the home needs too much work, you’ll be able to walk away from the sale.
Assemble Your Team
While it’s possible to do things all on your own, it’s better if you can put together a team to help you out. While these don’t have to be people on your payroll, it’s important that you have their numbers handy and a good working relationship with them to help make the process of investing and being a landlord, a much smoother ride.
“My sister-in-law, a Realtor, helped me secure my first rental property,” writes income property investor Lucas Hall in his article: Build an A-Team of Experts to Help You Succeed, on Cozy. “At closing, she graciously gave me her elusive little black book of contractors, lenders, and other professionals. Without that initial list of reliable professionals, I would have been struggling to get my first property up and running.”
Here are a few people you will want to consider having on your team as a property investor.
- An investor-friendly real estate agent
- An investor-friendly lender
- Contractors for repairs and maintenance
- A property manager
- An attorney
Location Is Just About Everything
Okay, it’s not everything –but it is extremely important. In fact, many experts say that where you buy matters more than what you buy. While you can make changes to the house itself, you can’t change the location, so look for a growing area that’s continuing to develop economically.
Tip: Take a look at the Renters Warehouse Market Research Center to get key data on market conditions for different areas. See population growth, unemployment rates, housing price appreciation and more!
Run It Like a Business
“Where people who want to become landlords fall short is, they don’t realize how much work goes into it,” said Diana George, founder of Vault Realty Group, now part of Century 21.
When it comes to investing, make sure you’re prepared for the amount of work that’s required. In many ways, overseeing rental properties is like running your business, and there are a number of responsibilities and requirements that you’ll need to perform. This includes everything from keeping up-to-date with landlord-tenant law, to doing taxes, to performing maintenance and repairs.
Make sure you plan to run your rental like a business. This involves budgeting and setting aside money from the rent to cover emergency repairs and unexpected costs that arise.
“Making sure that you’re budgeting for things in the right way,” said project manager and real estate investor Matt McKinney in a Renters Warehouse podcast. “So it’s a business, you have to run it like it is, you have to know what your income is, what your costs are, what your taxes are, you have to anticipate a certain amount of maintenance throughout the year.”
Take That First Step
Finally, once you’ve assessed a potential deal, and have all of the facts in, then don’t make the mistake of doing nothing. It’s vital that you go ahead and take that first step.
“Don’t let the fear of it rule your decision for it,” said McKinney. “It’s a calculated risk, like any investment, but it’s real estate so the value’s going to continue to grow over time.”
Being informed can make it a lot easier, giving you the information that you need to move forward.
Investing in real estate can be a great opportunity –whether you’re looking to diversify a stocks-heavy portfolio or create passive income for retirement. Start your own investment journey today by brushing up on your knowledge of investing –then take that first step towards investing and see for yourself why real estate is consistently ranked the number one investment for many.
Ready to get started? Download your FREE Real Estate guide on growing your portfolio. Not sure where to start? See: Real Estate Investing 101: How to Set Yourself up for Success.
Back to Posts