7 Tips for Investing in a Rental Property

7 Tips for Investing in a Rental Property

Investing in rental properties can be a lucrative endeavor that generates passive income every month. However, investing in rental properties isn’t as easy as it may seem. Buying the wrong property, renting to unruly tenants, or picking the wrong location can all lead to a money-draining investment that leaves you in mounds of debt. Before you start your journey to investing in rental properties, consider these seven tips to ensure you made the right moves.

1. Determine whether you want to be a landlord

First and foremost, you want to determine whether the life of a landlord is meant for you. Being a landlord isn’t a walk in the park. You have to be available at all hours of the day in case anything goes awry, such as a burst pipe or a clogged toilet. This can be especially troublesome if you’re out of town and can’t get back to your property quickly.

 

While being a landlord can be stressful at times, it comes with many perks. If you rely on being a landlord as your main source of income, you can create your own schedule and earn passive income. After your initial investment and any maintenance costs, the income you generate through rent can be put toward your own savings or living costs.

2. Pay off personal debt

Before you buy a rental property, you’ll want to pay down as much personal debt as possible. While some debt can be helpful for your portfolio, too much debt can lead to unattractive loan terms if you need to finance the property. Before you sign the deed, pay off any student loans, medical bills, and other debts.

3. Decide whether you want to buy or finance

When it comes to buying a home, you can either buy it upfront or finance the property. For most, paying $200,000-$300,000 for a rental home out of pocket is highly unlikely. However, if you have the means, buying your rental property can generate immediate positive monthly cash flow.

 

If you decide to finance, it’s important to remember that taking out a mortgage for a rental property is much different than financing your primary residence. Most lenders are wary of underwriting loans for rental properties and will ask you to meet strict requirements before getting approved, such as requiring a larger down payment and paying higher interest rates.

4. Understand landlord-tenant laws

Landlords also need to be well-versed in state and local landlord-tenant laws, such as obligations regarding:

 

• Tenants’ rights
• Security deposits
• Evictions rules
• Fair housing
• Lease requirements

 

Not knowing your state and local laws can land you in legal hassles that can eat up your time and money. Hire a lawyer to help you draft a fair lease, and invest time in learning the ins and outs of being a landlord. For example, you must understand tenants’ rights and how much you can ask for rent. Overcharging rent can be a violation of these rights. To find a reasonable price for rent, calculate rent based on income by taking a typical tenant’s gross annual income in that area and dividing it by twelve, then multiplying that number by the industry standard of 30 percent.

 

Example: ($50,000 gross annual income ÷ 12 months) X 0.3 industry rent standard = $1,250

 

With this simple equation, you can charge your tenants $1,250 for rent each month. Make sure that is enough to cover your mortgage and maintenance costs, as well as the profit you wish to earn, before you purchase the property.

 

Also, check existing rental prices in the area to make sure your calculation is realistic for the area you have in mind. If the numbers don’t work in your favor, consider a different location for your rental property purchase.

5. Search for a low-cost home

Searching for low-cost homes can help you save and earn more money. Buying the most expensive house on the block will mean you will have higher ongoing expenses that will eat away at your profits. However, make sure to steer away from the worst house on the block, as well. Buying a fixer-upper will take a lot of time and money to get up and running.

6. Sign up for landlord insurance

Landlord insurance can save you a lot of money in the event something ever goes wrong. Rental properties are expensive, so you want to protect them at all costs. Investing in landlord insurance can:

 

• Cover property costs
• Replace lost rental income
• Provide liability protection if a tenant or visitor gets injured on your property
• Cover property damage
• Provide you with peace of mind

7. Make the purchase

Once you’ve saved up for a sizable down payment, paid off debt, and secured financing (if applicable), take some time to research up-and-coming neighborhoods and hire a real estate agent. As you look for potential properties, keep in mind operating expenses and your return to ensure you’ll generate a profit. Once you sign on the dotted line and purchase your rental property, make cost-effective home improvements to boost its look and feel. Not only will home upgrades like a remodeled kitchen, updated bathrooms, or attractive landscaping increase your property’s value, but they’ll also allow you to ask for more money in rent.

Key takeaways

Becoming a rental property landlord is tough work. However, if done correctly, you can get one step closer to becoming a successful property manager within the booming real estate business. With these seven tips, you’ll be on your way to a lucrative future.

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