Thinking about turning rental property into your next side hustle? If a local bargain has caught your eye and you’re ready to try your hand at becoming a real estate investor, here’s everything you need to know about investing in rental property.
Why Invest In Rental Property?
Rental properties have remained a favorite among investors for good reason. The logic is straightforward: Housing demand never disappears. When your rent prices stay competitive, you’ll consistently find tenants willing to lease from you.
The primary appeal of investing in rental property lies in their income-generating nature. Monthly rental payments from tenants provide steady revenue to cover mortgage payments, taxes, insurance, and other expenses—while leaving room for profit.
Rental properties also function as appreciating assets, offering dual advantages:
- Each mortgage payment builds equity in the property.
- The property’s resale value typically increases over time.
When you eventually sell, you’ll receive both the accumulated equity and the property’s appreciation value—a powerful wealth-building combination.
Additionally, rental property ownership comes with significant tax advantages. Mortgage interest is tax-deductible, rental income isn’t subject to Social Security tax, and maintenance expenses can offset your taxable income.
No surprise that real estate investor Zach Evanish on the Side Hustle Nation podcast describes “single-family homes” as “an almost-passive investment.” Ready to launch this side hustle? Here’s your roadmap to get started.
How To Purchase A Rental Property
1- Research Properties in Your Area
Begin by determining exactly what type of rental property matches your goals. Options range from single-family homes and duplexes to condos and larger multi-family properties. Most beginners find single-family homes the most manageable starting point.
Popular home-buying platforms like Zillow or Realtor make browsing simple. While building your candidate list, evaluate these critical factors:
- Neighborhood quality—safety, school districts, shopping accessibility
- Local rental rates for comparable properties (use tools like Rentometer for free estimates)
- Property value trends in the area over recent years
- Property condition—turnkey ready or requiring significant upfront renovation investment
Thorough research is essential, as these factors directly impact your profitability.
2- Secure Capital and Plan Your Expenses
After identifying your target property, you’ll know exactly how much capital this venture requires.
The mortgage represents your largest expense. Unlike personal home loans that may accept 3% down payments, rental properties require a full 20% down payment. Without sufficient capital, explore funding strategies: monthly savings plans, redirecting work bonuses or tax refunds, or borrowing from friends and family.
Next, forecast your planned and unexpected expenses for the upcoming year, including:
- Property taxes
- Insurance premiums
- Utilities (water and sewer)
- Maintenance costs (repairs, lawn care, etc.)
- Property management fees
- Lost income from vacancy, delinquency, or legal issues
Use conservative estimates—these calculations can determine whether your investment succeeds or fails.
3- Run the Numbers Like a Business
Treat rental property like any business investment. Without solid numbers supporting your decision, it won’t generate profitable returns.
Calculate your projected return on investment using this formula:
- Annual rental income (example $12,000)
- Minus vacancy rate contingency (example 10% = $1,200)
- Minus annual mortgage principal and interest (example $6,000)
- Minus planned and unplanned expenses listed above (example $3,000)
- Add equity building in the property (example $1,200)
This example yields a positive rental property profit of $3,000 annually (or $250 monthly). If this return justifies your investment, it’s time to purchase the property and become a landlord!
4- Consider Hiring a Property Manager
While interviewing tenants might seem like the logical next step, consider finding a property manager first to handle these responsibilities.
According to legal resource Nolo, property management companies provide tremendous value. Beyond tenant screening and rent collection, they handle tasks you may prefer to avoid—property maintenance, repairs, and even evictions when necessary. Search local listings or contact the National Association of Residential Property Managers (NARPM) for qualified options.
Whether you work with a property manager or handle things independently, your workload becomes minimal once tenants are in place. Periodic property inspections ensure everything runs smoothly while maintaining tenant relationships and documenting business transactions for tax purposes.
Then simply enjoy your new passive income stream!
REITs – A Rental Property Alternative
Alternatively, you can enjoy real estate investment benefits without property acquisition hassles by investing in a REIT. A REIT (real estate investment trust) owns diverse real estate portfolios including apartment buildings, offices, warehouses, and more.
Beyond eliminating direct real estate management, REITs attract investors through impressive dividend yields. Average REIT dividends pay approximately 5%, significantly higher than the 1.9% average stock dividend.
REITs trade on public markets like stocks and can be purchased through:
- Full-service brokers like Vanguard and Fidelity
- Discount brokers such as E-Trade or TD Ameritrade
- Robo-advisors like Betterment, Wealthfront, and M1 Finance
