Rental Investing 101

Rental Investing 101Along with record low interest rates and the drop in the U.S. median list prices, it is an enticing opportunity to become a rental property owner. Here is some information to help you determine if this is the route for you, as well as some tips on doing it the right way.

The 2 main benefits of real estate investing are real estate appreciation and cash flow income. Although a little trickier and more risky today, real estate appreciation can occur in some instances, but the primary goal is positive cash flow income.

One thing is certain, it is hard work, and not as simple as the TV shows that show how seamless flipping homes can be. You need to do your homework and be prepared prior to even looking at places to rent. Also you must be prepared for unexpected hassles and issues, but always be thinking long-term gains to help offset the pain of these occurrences.

If you play it smart and are willing to put in a decent amount of effort and research, you could earn a substantial income from rental property investing and possibly even retire early.

If You Don’t Plan to Live There First, Never Purchase A Real Estate Investment In Your Own Name

Lessen your personal risk and hold the investment in a LLC (Limited Liability Company) or LP (Limited Partnerships). That way in case the investment turns sour or if someone sues you related to an injury on your rental premise, they will have no way of coming after your personal assets. The only risk is the investment itself.

Advantages of First Living in the Future Rental Property

Buying as an owner occupant gets you the best financing and you can usually put down a smaller down payment. Another advantage is that you learn the property, its advantages and disadvantages and areas for repair or remodel before renting it out. You will also naturally buy a property in a desirable location, which will also be desirable for your tenant in a few years.

Think Long-Term Investment, Avoid the “Get Rick Quick” Mentality

Long-term investment is the key to your greatest return on investment and equity later on. In today’s economy, if it seems too easy and too good to be true, avoid it, it’s likely a scam.

Positive Cash Flow Properties

Make sure you take into consideration all your expenses (taxes, utilities, HOA fees, maintenance, lawn care, insurance, etc), then add in your mortgage payment to determine rent which allows a monthly positive cash flow. If this rent is out of range from what is normal in the area, it is likely not a wise investment. A good way to quickly analyze for potential positive cash flow is to take the estimated rental income and divide it by the home’s purchase price. The closer to 1% it is, the better the investment. Here is a great article on Estimating Rental Property Expenses.

Do Your Homework

This process should take about 3-6 months. Study the area: check crime rate, school district, nearby amenities. How many foreclosures are there? Are the rentals providing a positive cash flow and investment returns? How much work does the home need? You will want to make sure the home is in decent shape for the tenant, to increase the pool of possible tenants who will rent it. Lastly, consult with other seasoned investors for their expert opinion, read books, and go to local investment clubs if they exist.

Just remember, this is a long-term investment opportunity. As long as you are willing to accept this fact, then your potential for profit and success in rental property investing will increase considerably.

If you found value in this information, please share with your social networks. If you have questions or insights to share, please comment below.

~Kent Brumm, Keller Williams Realtor

Rental Investing 101

 

 

 

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