Have you thought about investing in rental properties? Smart investments may give you a surprising return.
As with any investment, learning as much as you can beforehand investing is strongly recommended. Knowledge is important when it comes to making good rental property investments.
When you turn out to be successful, it’s possible to earn a passive income. That’s the ultimate goal for many people. Receiving a monthly passive income allows you to grow your money and pay off any debt, allowing you to be able to achieve a better work-life balance.
It sounds quite good, doesn’t it?
That’s why we have created this beginner’s guide on making money with rental properties. After reading this article, you’ll know the most important basics. From there on, you can start doing further research and plan the practical steps.
1. Assess your finances
Before anything else, you need to have a good look at your financial resources. Investing isn’t something that comes at the expense of your existing responsibilities. Assess your finances realistically.
How much can you invest in the property?
In order to answer this question, you should decide how you will buy the property. A mortgage loan or all-cash? It’s important to consider the implications that come with making this choice. Among other things, the decision affects your return on investment.
Let’s take a closer look. All-cash payment sets you up for higher potential profits. Remember though, that buying a property like this requires more capital. As a beginner, you might lack sufficient funds. Opting for the mortgage loan means you should expect smaller profits, but also encounter some of these benefits:
• You have more leverage to buy rental properties.
• Typically, mortgage loans for income properties finance any type of property (from condos to townhouses).
• You are able to use your rental income as a way to pay off the mortgage.
Ensure that your personal financial future is in good shape before investing in any property. For example, consider any debt or (un)expected expenses.
2. Calculate the expenses
Another thing you need to keep in mind is the operating expenses. Many beginner investors downplay their importance. This is dangerous. Not factoring in all the various expenses affects the profitability calculations.
What exactly are these expenses?
We’ve listed the typical ones below:
• Property taxes
• Rental income taxes
• Repair costs
There may be more expenses depending on your state, property type, and other variables. You should understand the extent of these expenses before buying the property.
One of the ways to ensure you are in the know is assessing the property by taking a tour inside. You’ll clearly see what needs maintenance and repairs.
You could try to think a few steps ahead and question which parts of the property are more liable to wear and tear? This way you’ll deal with as little unexpected expenses as possible.
3. Research the market
Focus closely on the real estate rental market in the areas that interests you. This is a crucial step. The basic research question concerns the demand for rental properties. When buying a home is expensive, people tend to prefer renting their apartment or house instead.
However, the current demand is only part of the equation. While you can’t predict everything, it’s still important to use any available information to make better decisions. For example, new construction and development affect the rental market in the future.
4. Understand the location
Researching the real estate rental market situation provides necessary input for your calculations. At the same time, you need to conduct research about the location as well. The best properties have great transport connections and good education close to home. Don’t discount enough opportunities for shopping or entertainment as well.
Determine the factors based on local reality. What matters about the location and surroundings depends on the context. What’s important in a predominantly industrial town might be different from a famous college district.
5. Consider the responsibilities
Investing in real estate comes with a set of responsibilities. You need to make sure the tenants receive basic utility services including electricity, heating, and plumbing. You are legally responsible for keeping the property aligned with the local building codes.
Good landlords answer calls and have a proactive mindset. That means a successful investment consumes some of your time.
You need to keep an eye on your investment. There are many practical procedures that help you secure the investment and its return. For example, you need to collect the rent along with the security deposit. Your tenant damages the property, and it’s not due to an unfortunate situation? You should evict them. Of course, base your actions on all the legal requirements. Screening the tenants in a proper fashion often helps to avoid these situations.
So, how do you make money with rental properties?
Before investing in a rental property, you need to assess your finances and calculate the expenses. If you want to make money, you need to take the time to conduct a thorough analysis.
Even if your finances allow you to make the investment, it’s smart to conduct a lot of research. There needs to be a demand for rental properties.
If you really want to make money, then the property should be in a lucrative location.
Having tenants in your rental property leads to certain responsibilities. Additionally, there are many practical actions to ensure you don’t lose money. Evicting problematic tenants, collecting rent, and keeping the place maintained are just a few examples. Free time is essential to making a property investment work and to receive a nice return on it over time.
As a beginner, it’s possible to make money with rental properties. It’s essential to do a lot of calculations and research before committing to anything. This way you can maximize the chances of the property making money instead of draining your bank account.