Rental Property Investing: The Basics of Rental Business
Investing in real estate is lucrative. It can bring a huge return on investment – with dedication and hard work, of course. While there are several methods on how you can earn a profit in real estate, one of the most common ways is through rental properties.
For real estate investors, rental properties can be a great starting point in the world of real estate. Proper management of rental properties can bring cash flow and also generate value from appreciation. Whether your goal is to save up money for retirement, to be financially prepared to face any crisis, or simply to increase your wealth, it’s important to first determine the profitability of the particular rental property you’re interested in. That is why investors use a rental property investment calculator to measure a rental property’s potential return on investment.
What is a rental property?
A rental property can be a personally or commercially owned property that is rented or leased out to a tenant over a specific period. The terms can be on a short- or long-term basis. The stay of the tenants will depend on you and how you advertise your property in marketplaces.
In the U.S.A., the rental property industry is continuously growing, so much that its share of revenue increased by 3.4% since 2014, according to the data of iPropertyManagement. In fact, the industry brought more than $176 billion in revenue in 2019. Although the average cost of rent has increased by 3.2% over the past five years, a lot of Americans continue to rent property. The latest update is that 36% of the U.S. population lives in a rental property.
As you can see, rental property is a good investment because you’ll never run out of potential customers to target. The population continues to grow, and shelter is a basic human need. This pushes the demand for the rental market to grow as well. If you are interested in investing in rental properties, here are some things you need to know:
Appreciation and depreciation
Investors have various reasons as to why they want to be a part of the rental property industry. If your goal is to be able to sell your property after a few years, then you should understand what real estate appreciation and depreciation means.
Real estate appreciation is an increase in the value of a property which can be due to increasing demand, inflation, or renovations done to the property. Meanwhile, real estate depreciation is a decrease in the value of a property.
While depreciation may connote a negative meaning, it can also have a positive impact when it comes to real estate investing. That is because real estate depreciation can also be defined as a type of income tax deduction, which gives the taxpayer a chance to recover the expenses placed into their investment.
A real estate property’s value has a high chance of increasing over time. This creates more equity for the owner. On the other hand, when a property depreciates, the tax basis is reduced. Using a rental ROI calculator can help you determine the potential of a property to appreciate or depreciate. But remember that these are just estimates that will help you in your investment decisions.
Determine what you want to invest in
The good thing about rental property investing is that you get a lot of choices. Some of the most common types include:
Single-Family Homes
This type of property is an independent residential structure built on a land of its own. The original purpose is that for the property to be used as a single dwelling unit. It usually has one kitchen, as well as unshared walls and utilities. It is believed to be the most popular choice among rental property investors.
Multi-Family Homes
This can be an apartment building or a simple property divided among different units so multiple families can stay under one roof. The more tenants, the higher the income it can provide to the investor. However, you have to provide more attention to detail when it comes to property and tenant management.
Luxury Properties
These are high-end properties furnished with state-of-the-art appliances and other technologies. Needless to say, they are expensive and specifically target the wealthy. You may not rent one of these out as often as other types of properties. However, when a tenant rents it, you can expect to receive a large amount of money for their stay. Investing in this type of property is high risk, but it can bring higher profits if managed correctly.
Vacation Homes
Perhaps one of the most common rental properties is a vacation home. They are typically located in areas near holiday destinations or other top attractions. Your rental income for this type of property depends on the season of the year. You may want to take in as many tenants as you can during peak season so you can maintain the property throughout the year, even if there is a period of vacancy.
Commercial Properties
This is a real estate property solely used for business purposes. It can be used as a warehouse, shop, or any kind of retail. Also, these tend to have longer-term lease contracts compared to other rental properties.
Analyze your cash flow
Cash flow is simply a reflection of what comes in and out of your business. In real estate, you can see it in how much income the property generates and what its expenses are. Generally, you’ll want to invest in a property that has a positive cash flow. You can use an income property calculator to see if a property generates more income than expenses.
There are different strategies available when looking for a positive cash flow property. For one, you may want to consider properties situated in attractive areas as these can appeal to more tenants. Another option is to target properties under renovation as they can be a factor for higher rental rates.
Look for financing options
As we all know, investment requires a certain amount of money. If, upon using a rental property investment calculator,you find out that youdon’t have enough cash, there are several financing options to consider:
Bank Loan
In bank loans, you need to pay 20% to 25% of the down payment for the rental property. Then, the bank takes care of the rest of the payment. You will be required to pay back the bank through a monthly payment schedule over a fixed period. The terms will depend on the requirements of the bank.
Government-Backed Loan
The U.S. Department of Agriculture (USDA), Federal Housing Administration (FHA), and Department of Veterans Affairs (VA) loans require borrowers to live in the property they want to purchase and make it their residence. However, investors can use a workaround for this rule. They can use these government-backed loans to acquire a multi-unit property and live in one of the units while renting out the others to tenants. This type of loan doesn’t have strict credit requirements, offers low-interest rates, and may even charge smaller than usual down payment fees.
Conventional Loan
A mortgage loan that is not backed up by the government is called a conventional loan. This type of loan is usually issued by private lenders. Also, the borrower pays for the insurance. It may require 15% to 25% of the down payment depending on the type of rental property you’re trying to acquire. If you have a low credit score, you don’t need to worry because those who offer conventional loans are not too strict with that. Moreover, these offer you the freedom to own the property with no residency requirements.
Seller Financing
This financing option takes you away from the complex process of applying for loans from financial institutions. Instead, you negotiate directly with the seller of the property. This is the best option for those who are having a hard time getting a conventional loan. Compared to a bank mortgage, there are few to no closing costs in seller financing. Furthermore, these are more flexible when it comes to down payments.
Get listed in real estate websites
Once you have purchased a rental property, it’s time to work on your marketing strategies. In today’s generation, almost everyone is connected online. Binary Fountain’s survey says that 96% of their respondents trust online reviews and ratings when looking for rental properties. 85% of them also added that they still consider online sources even if someone already gave them a recommendation regarding a certain property. This just shows how influential the Internet can be with our choices, including when finding rental properties.
There are a lot of real estate websites available online, including The Short Term Shop. Not only will you see different property listings there, but they also offer a tool wherein you can evaluate the potential of a property. Try this investment property calculator to find out!
Learn how to manage a property
To guarantee a huge return on your investment, you have to learn the ins and outs of rental property management. Sure, managing the property on your own can be overwhelming, but you’ll eventually get the hang of it. Take a look at this simple guide regarding property management:
Landlord Obligations
As a landlord, it is your job to find a tenant through advertising your property, hosting open house events, or other types of opportunities. But you also need to check your potential tenant’s background for your own sake. Once you have found a good tenant, it’s time for the signing of the lease agreement.
Property Maintenance Obligations
Part of your duty is to oversee the condition of your rental property. Repairs, especially those that require immediate action, should be handled promptly. You also need to make sure that your property is up to code and undergoes yearly inspections.
Tenant Management Obligations
Communication with your tenants doesn’t stop with the signing of the contract. Treating them as a family is one way of providing excellent customer service. Learn to listen to their opinions and respond to their requests. Regularly send rent reminders so that they won’t forget their dues.
Rental Property Record Keeping
Landlord documents, including rental applications, rental lease agreements, insurance, and rent receipts, serve an important role in rental property management. Make sure to store all of them properly. It’s best if you back them up digitally as well. This is so you can prevent any liabilities or tax issues.
Rental Property Accounting
Part of the duties of a landlord is dealing with the financial details. First, you need to set your rent price. If you haven’t done so yet, use a rental rate calculator to ensure you’ve set the right amount. You should also know how to manage rental property income and expenses. Furthermore, you will be the one responsible for collecting rent from the tenants and managing security deposits, as well as doing tax filing and reporting of expenses.
Conclusion
Having a rental property business can be rewarding, but getting one started is definitely not easy. The challenge begins with searching the property. To ensure you get the right one, you need to use a rental property investment calculator and complete other real estate analysis work. You also need to have financing to ensure you’ll get the property. And once you own the property, you need to study the different obligations of rental property management for you to thrive in the business.
Get all the details you need to know about rental property investing at News Pronto. We provide global authoritative news and information. If you already have a rental property, visit our website to learn how to showcase it more!
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