How To Invest In Rental Property

by | May 16, 2020 | Investing, Real Estate Investing

Are you thinking about making a rental property your next side hustle?  If you’ve got your eye on a local bargain and think you’d like to try your hand at becoming a landlord, then here’s what you need to know on how to invest in rental property.

investing in rental property

Why Invest In Rental Property?

Rental properties have been a popular option for investors for some time now.  The rationale behind it is simple: People will always need a place to live.  As long as the rent you’re asking is reasonable, then you’re likely to find people who will lease from you. 

One of the biggest draws to investing in rental property is that they are an income-producing asset.  Your tenants will pay you rental income every month, and you can use this revenue to pay for the property’s mortgage, taxes, insurance, and other expenses as well as keep some profit for yourself.

Another big advantage is that the rental property is likely to be a value-increasing asset.  This means two things:

  1. Every time you pay the mortgage, you are building equity in the home.  
  2. The resell price of the property will likely increase over time.

Combined, that means when you eventually sell the property, you’ll receive a check for all of that equity you’ve built plus the appreciation of the home’s value.

Finally, there are many tax benefits to owning rental property.  The interest you pay is tax-deductible, the income isn’t subject to Social Security tax, and you can use the maintenance expenses to offset your taxable income.

It’s no wonder you’ll hear people like real estate investor Zach Evanish on the Side Hustle Nation podcast claim that “single-family homes can still be an almost-passive investment”.  If you’d like to start making this your next side hustle, here’s how you can get started.

How To Purchase A Rental Property

money on rentals

1-  Start Researching Property In You Area

Step one is to decide exactly what type of rental property you’d like to purchase.  Rental properties come in all varieties of shapes and sizes.  You might wish to own a single-family home, duplex, condo, or even something larger (such as a multi-family property).  For most beginners, a single-family home is the easiest type of property to start with.

You can use popular home buying sites like Zillow or Realtor to start browsing.  As you’re putting together your list of potential candidates, you’ll want to consider the following points:

  • What is the neighborhood or area like?  Is it safe, near good schools, local shopping, etc?
  • How much is the rent for other rental properties near this area?  Try a free tool like Rentometer.
  • Have property values in this area been increasing over time?
  • Is the property in good condition (maybe even turnkey), or will it require a lot of up-front investment for renovations?

Be prepared to do some homework as the answers to these questions will definitely have an impact on your bottom line.

2- Raise Capital And Covering Your Expenses

Once you’ve got a good idea of the property you’d like to buy, you’ll then know how much money you’ll need to target for this business venture.

The biggest of these will likely be the mortgage.  Unlike your private mortgage which will let you offer as little as 3 percent often for a down payment, a rental property is going to require the full 20 percent.  If you don’t have that much capital, start thinking about how you could raise it.  You might want to start putting money aside every month, saving your work bonuses or tax refunds, or even borrowing from friends and family.

Next, you’re going to want to think about your planned and potentially unexpected expenses for the next year.  Consider:

  • Taxes
  • Insurance
  • Utilities (water and sewer)
  • Maintenance (repairs, lawn care, etc.)
  • Property management
  • Lost income due to vacancy, delinquency, legal disputes, etc.

Be conservative with your estimates since they again could make or break your decision to move forward.

3- Make A Smart Business Decision

rental properties

A rental property is a business case just like any other.  If it’s not supported by the numbers, then it won’t make a good investment.

To do this, you’re going to want to forecast your return on income as follows:

  • Annual rental income (example $12,000)
  • Minus a vacancy rate contingency (example 10 percent = $1,200)
  • Minus the annual mortgage principal and interest (example $6,000)
  • Minus the planned and unplanned expenses that we covered above (example $3,000)
  • Add the equity you’re building in the property (example $1,200)

In this example, you’d end up with a positive net profit of $3,000 per year (or $250 per month).  If that seems like a worthwhile investment to you, then it’s time to buy that property and become a landlord! 

4- Hire A Property Manager

Logically, the next step in this process would be to start interviewing tenants to occupy your new rental property.  However, it might make more sense to first find a property manager to handle this for you.

Legal site Nolo suggests that property management companies can be a huge asset to your business.  Not only can they handle interviewing tenants and collecting rent, but they can also do a lot of things you may not want to do like the property maintenance or evictions (if it comes to this).  Can check for local listings in your area or check with the National Association of Residential Property Managers (NARPM) for potential options.

Whether or not you decide to work with a property manager or go it alone, after you get your first tenants, the amount of work you’ll need to invest should be pretty minimal.  You can periodically check it on the property to make sure nothing sketchy is going on while also making sure that the tenants are doing well and have no complaints.  Also, you can keep written records of all your business-related transactions for when you file your taxes at the end fo the year.  

But otherwise, enjoy your new-found passive income!

REITs – A Rental Property Alternative

As another option, you could also enjoy the benefits of owning real estate without the hassle of having to research and acquire the property by investing in an REIT.  A REIT (real estate investment trust) is a company that owns combinations of various real estate holdings such as apartment buildings, offices, warehouses, etc.  

Other than not having to deal with the real estate directly, REITs are attractive to investors because they produce relatively high dividend yields.  The average REIT dividend pays approximately 5 percent whereas the average stock pays 1.9 percent.

REITs can be purchased on the open market just like stocks.  They can be purchased through any of the following:  

<span style="font-size:12px;font-weight:500">Author</span><br><a href="https://wealthpursuits.com/author/kevin/" target="_self">Kevin</a>

Author
Kevin

Kevin is an ambitious entrepreneur that is obsessed with all things related to finance. From a young age, Kevin has always been involved with side hustles ranging from online selling to freelance work. Over the years, Kevin graduated from side hustles and started launching multiple online and offline businesses. Kevin is a serial entrepreneur who loves starting new businesses and exploring all things related to business and finance. He is constantly looking for new ways to save money, invest money, and create income streams.

Related Content:

Charlie Munger Investment Advice – 10 Actionable Tips

Charlie Munger Investment Advice – 10 Actionable Tips

Charlie Munger is the business partner of Warren Buffett and the vice-chairman of Berkshire Hathaway. Munger’s investment philosophy closely mirrors that of Buffett – he believes in investing in strong businesses with a long-term mindset. In this article, we’ll take a...

Jack Bogle Investment Advice – His Top 10 Philosophies

Jack Bogle Investment Advice – His Top 10 Philosophies

John C. ‘Jack’ Bogle was the founder of the investment firm Vanguard and is widely regarded as the father of modern index funds. He spent decades railing against active investing in general and high-fee mutual funds in particular. In this article, we’ll take a look at...

Jim Cramer Investment Advice – 10 Top Recommendations

Jim Cramer Investment Advice – 10 Top Recommendations

Jim Cramer, best known as the host of the CNBC show Mad Money, has made a career out of offering investment advice and stock picks. In this guide, we’ll take a look at 10 of Jim Cramer’s top pieces of investment advice that you can use to improve your performance in...

Dave Ramsey Investment Advice – Top 10 Finance Tips

Dave Ramsey Investment Advice – Top 10 Finance Tips

Dave Ramsey is a well-known financial guru who has spent decades helping individuals manage their finances and invest for retirement. In this guide, we’ll look at the top 10 Dave Ramsey investment advice tips for how you can manage your money and invest for the...

Mark Cuban Investment Advice – 10 Tips For Better Investing

Mark Cuban Investment Advice – 10 Tips For Better Investing

Mark Cuban is the owner of the Dallas Mavericks, an investor on the popular show Shark Tank, and co-owner of the media company 2929 Entertainment. He is worth an estimated $4.3 billion, which he earned primarily through investing in startups over the course of his...

How To Pick Dividend Stocks – A Complete Guide

How To Pick Dividend Stocks – A Complete Guide

Dividend stocks are popular among investors looking to generate steady income as well as earn profits through stock price appreciation. Dividends can be reinvested to buy more shares of the same stock or used to provide cash flow for your bank account. In this guide,...

Warren Buffett Investment Advice – 10 Tips He Swears By

Warren Buffett Investment Advice – 10 Tips He Swears By

Warren Buffett is arguably the most famous investor in modern history. The “Oracle of Omaha,” as Buffet is known, has a net worth of $100 billion after more than 50 years at the helm of Berkshire Hathaway. In this guide, we’ll take a look at 10 pieces of investment...