There are dozens of ways you can start investing in real estate.
But, if you’re looking for a steady inflow of cash, there is no better way than buying rental property.
What do you have to do for this?
Buy a property – rent it out and enjoy the steady inflow of money until you choose otherwise.
Many investors around the world use this strategy to generate a steady inflow of cash.
But, is it that easy? Or, does buying rental properties require a strategy?
Well, you might have heard about smart investments, right?
Jog your memory a little, you might have in your real estate licence training.
Yes, that’s your two cents of wisdom for buying rental properties.
As long as you’re taking the smart approach, you’ll be well on your way to generating a steady source of income for yourself.
Sure, there will be some speed bumps along the way, but you have to stick to your game plan persistently to be successful.
Don’t Be A Bundle Of Nerves
Come Out OF Your Fears, Already! JUST DO IT!
Let’s clear the air a little bit, everybody makes mistakes, I’ve made quite a few myself.
But, does it stop me? No!!
And, it shouldn’t stop you either.
You can take a precautious approach to investing but don’t let the analysis paralysis keep you down.
Start somewhere, even if it’s a small investment.
As long as your smart strategy is concerned. Through this blog I will take you through all of the different aspects you should consider when buying rental property.
You can use this blog as sort of a checklist to your plan for buying an investment property that you’ll use to keep the money rolling in.
Step #1 – Choosing Your Property Type
Well, there are many kinds of rental properties that you can start investing in. You can choose to invest in single family homes, multi family units, shopping centers, storage units, office buildings, and what not.
All of these categories have varying prices and opportunities, it’s your job to choose one, depending upon the size of the investment you want to make.
Let me give you a breakdown.
- Single Family Units
- Multi Family Units
- Shopping Centers
- Office Buildings
- Storage Units
Besides these self managed options, there is also the option to invest through different investment funds. These funds are a wonderful way for small time investors to get started in real estate investing and make their way from there.
Guidance Tip: As an investor who’s starting anew, I would advise you to start with residential single family homes.
Step # 2 – Choosing Between Local or Long Distance Properties
The second step you have to take care of before you get into buying rental property is to decide whether you want to invest locally or in a long distance property.
What do I mean by this?
A local investment would be in a property located in your own market, your own neighbourhood, or your own city.
But a long distance investment would mean investing in another market, another city where you see a potential of market value increasing over time.
Still not making sense? Hold on a minute.
Benefits Of Investing In A Local Property
- Easily manageable
- Easily rented out
- Self monitor able
Benefits Of Investing In A Long Distance (growing market)
- Higher rents
- More cash flow
- Greater returns
Guidance Tip: Start by investing locally and then look to expand to other markets over time.
Step #3 – Choosing Between Appreciating Properties or Cash Flow Only
As an investor who’s focusing on buying rental properties, you need to understand how different markets behave over time.
It’s an analysis of the current market value of a property against the predicted market value over a certain amount of time.
Let me paint a scenario for you.
There’s a property 1 in Market A which has a market value of $100,000 dollars and its expected value is predicted to increase to $150, 000 in 1 year.
On the other hand, you have property 2 in Market B which has the same market value but its expected value is predicted to stay the same in a year.
Obviously, you’d want to choose property 1, I would too.
But, it’s crucial that you keep step #2 in mind when making the decision to invest in other markets.
Step #4 – Self Management Or Hiring A Property Manager
This is one of those decisions, you’d have to make after you’ve purchased the property. You can choose to manage those properties yourself.
However, if you don’t want to be actively involved in managing those day to day tasks, you can always hire a property manager to do the job for you.
Still, it’s a decision you have to take carefully.
By managing your properties yourself, you can save up on money and keep a close watch on everything.
Only, if you want to get away from all the hassle like interviewing tenants, managing rents etc. and don’t want everything on your plate, you can hire a property manager just keep in mind that this person you hire is not only going to represent you but your money as well. So until and unless you trust them fully, don’t hire them.
Benefits Of Self Management
- No extra costs
- Closely monitored properties
- Full control
Benefits Of Hiring A Property Manager
- No hassle
- No rushing to emergencies
- No extra work
Guidance Tip: Unless you have more than 5 properties on rent, you should be managing them yourself.
Step #5 – Keeping Demographics In Mind
Quite frankly, this is one of the most important aspects to consider with your investment property.
My friend, you have to make sure that all your demographics match up so that you can be successful as a rental property investor.
Did this just go over your head?
Hold on, Let me explain further.
A property located in an area that doesn’t have any good schools is never going to appeal to a family with kids.
All your demographics should match up to the rent you’re proposing for your property. If it doesn’t, you’ll definitely have a hard time find a tenant
Guidance Tip: Ask yourself whether a particular property is suited to a family or single people?
Step #6 – Choosing To Finance or Cash
A single question you need to ask yourself when buying rental property is whether you want to pay cash or finance?
If you know the answer, your job will be a lot easier.
Let me take you through both options and then you can decide what works best for you.
When you’re paying cash, sure, you’re playing the safe game as you’re debt free. Choosing cash though, you only have limited funds and you can invest in 1 or 2 properties only.
On the other hand, when you’re getting finances, you can pay down payment on multiple properties and generate more revenue.
Benefits Of Paying Cash
- Debt free
- No financial obligations (except taxes)
Benefits Of Financing
- Multiple Investment Options
- More revenue
Step #7 – Choosing The Location wisely
Remember my friend, a great rental property would be one that doesn’t give you any trouble. It attracts tenants and is located in a great area so they pay their monthly dues on time.
What categorizes a great property?
I have managed to put together a list of different properties that are great to rent and would certainly be a smart investment.
Located Around Schools: The most common tenants are usually young families with kids. So a property located near good schools would attract more families and it will be easier to rent them out.
Good Neighborhood: There are people that look for houses in great neighborhoods because that overall environment is important to them. These people would even sacrifice living in a not so great house to live in a good neighborhood.
Smaller Houses: One thing you need to understand is that smaller houses are easier to rent out in comparison to larger ones. So think smartly, when buying rental property.
Houses With Not Too Many Upgrades: I get it, accessories are great but they don’t get you any extra rent, do they? So when making an investment, look for a clean and nice one after all that’s what people need, not what they want.
Guiding Tip: Start with smaller houses or even apartments that get you a steady in flow of cash.
Step #8 – Keeping A Budget For Maintenance
One mistake that I’ve seen many investors make is to not doing the math properly.
It’s easy to get distracted by all the money coming in. It’s easy to lose track and not keeping a maintenance budget in mind.
Don’t ever do that!
No matter how good your property is, there are always going to be some maintenance charges if not many.
Always keep the worse in mind when planning these things out.
If you do so, it will be easy to deal with these situations and you’ll be more comfortable handling things out.
Step #9 – Invest In A Property That Has Positive Cash Flow
Whenever you’re buying an investment property no matter rental or any other, always always invest in properties that generate positive cash flow.
You have to analyze all your options and invest in a property that will make you money.
How it’s done?
You choose a property that will get you a rental income that is more than the monthly mortgage and HOA expenses. Always bear in mind to do your numbers accurately, calculate everything, and see what’s the best option for you considering your financial goals.
Let’s say you invest in a property that gets a rental income of $550 and your mortgage and HOA expenses are more than that. This property is not doing you any good, my friend. It has a negative cash flow.
Ding Ding Ding, pull your money out and invest in some other property that will generate positive cash flow for you.
Step 10 # Always Have An Exit Strategy
You might have heard of having an exit strategy for your real estate investments.
Substantially, buying rental property is not any different.
When you buy a property, ask yourself, what’s your goal? What do you want from this property? And, for how long do you want to keep it? It’s always good to plan ahead. Think about your exit strategy and how you’re going to handle it.
Do you want to keep your property and rent it out till you retire? Or, do you want to capitalize on the market situation by selling at a higher price and move on to something bigger.
The Bottom Line
Let me put this as clearly as possible for you. Real Estate Investing is an uncertain road. There are always going to be ups and downs. So it’s always good to have a plan and a strategy in place to achieve your goals. The key to being successful is sticking to your game plan. Period.