Many people dream of being able to invest in rental real estate as a method to generate passive income. Even though you can save money and invest in the stock market to become a billionaire, real estate has always been a good way to make money and diversify your investments.
People will always need a place to sleep and work, after all. They’ll have to rent from a landlord (you!) if they can’t afford to purchase their own home.
While owning rental property does not ensure that you will become a billionaire, and you do not need to own rental property to become one, there are several advantages to doing so.
Purchasing rental property may be done in a variety of ways. You don’t always need a significant sum of money to purchase your first home!
Why Should You Invest in Rental Properties?
Andrew Carnegie, the wealthiest man in the world during his period, famously said:
Real estate is responsible for 90% of all millionaires.Real estate has earned more money than any other industrial asset combined. Today’s astute young guy or salary worker puts his money into real estate.
Even though the world has changed a lot in the 100 years since Andrew Carnegie said this, one thing has stayed the same: investing in rental property can give you a steady income whether you are working or retired.
Rental properties may be “recession-proof.”
As interest rates on house mortgages rise, more individuals may choose to stay as renters rather than become homeowners. Renting rather than purchasing a property may be more economical or convenient.
Another reason for the popularity of real estate as an investment is that it is a tangible asset that can be seen and felt.
Despite the fact that we live in a digital age, there is still something to be said about holding real goods that you are aware of. Also, people always need a place to live, so if you choose the right rental market, you can be sure that there will always be people who want to rent from you.
While housing prices fluctuate, they usually rise over time.When you’re ready to downsize, you may sell your house or even pass the firm on to your offspring.
Stock investments, which might be more volatile, are not necessarily the same. If a firm loses popularity with investors or the market as a whole declines in value, your whole portfolio loses value. Even if your 401k looks more like a 201k, you may still make a consistent income with rental real estate.
You may invest in a variety of ways.
There are several options for purchasing rental property, including:
Houses with many families (duplexes, apartments)
Houses on wheels
Property for sale in the commercial sector (office buildings, strip malls)
Real estate for industrial use
Because there are fewer hurdles to entry and it is more cost-effective, the ordinary DIY investor may choose to invest in residential real estate.
Where Can I Purchase a Rental Property?
As a single investor or as part of a group, there are several options for purchasing rental property. If you follow a few of these tips, you might even be able to buy rental property without having to be there full-time like a typical landlord.
Your Own Residence
Your existing residence might be a good place to start. One option is to rent out your completed basement. Even if you have to pay a few thousand dollars to build a separate living area, it will still be less expensive than purchasing a second home.
You may rent out your present home if you’re planning on relocating to a new one. The monthly rent from your previous property may be used to pay for your new house’s mortgage, while your day job income can be saved for other financial purposes.
You may be able to transform your home into a holiday rental depending on where you reside. As an Airbnb host, you may be able to make more money from vacationers than from long-term rentals.
Depending on the sorts of renters that are interested in your house, Airbnb rentals may also be less stressful.
Tip: Some first-time landlords purchase a duplex and rent each property for the same monthly mortgage payment. You charge each renter $500 if your monthly mortgage payment is $500. When just one side is occupied, you still break even. Alternatively, you may live on the other side of the house and have your renter pay the full mortgage.
RealtyShares (number 2)
Another popular crowdfunded real estate investing option is RealtyShares. The minimum investment is $5,000. However, this platform is only open to authorized investors with a high net worth.
If you qualify as an investor, you should look into RealtyShares if you want greater investing options. Additionally, investment costs are reduced, allowing you to retain more of your investment income.
Individual residential and commercial properties are available for purchase via RealtyShares. Fundrise only lets you invest in a group of properties that the eREIT team has chosen.
eREITs are a good option if you don’t have the time or knowledge to look at a lot of rental properties, but you might make more money if you choose your own transactions.
Because crowdfunded real estate dividends are taxed as regular income rather than capital gains, you may want to form a RealtyShares IRA to reduce your taxable income.
3. Peerstreet is a peer-to-peer social media platform.
Accredited investors can also look for rental properties on PeerStreet. PeerStreet projects mature in 18 to 24 months, while other crowdfunded real estate projects may take three to five years to pay back your whole investment.
You will get interest payments every month and will be able to get back what you put in within two years.
PeerStreet also offers an automatic investing tool that may help you find the greatest real estate bargains. You keep putting money into certain projects so that you can spend less time looking for properties and more time making money without doing anything.
When you hear the words “rental property,” your first thought is that you’ll need to put down at least $150,000 right now to become a landlord.
Fundrise is an online platform that allows anybody to invest in rental property for as little as $500. You also don’t have to deal with the hassles of being a landlord while still reaping the rewards of being a private real estate investor.
Investing with Fundrise is also less risky since your money is put into an eREIT (Electronic Real Estate Investment Trust) that offers you a stake in residential and commercial real estate developments around the US, allowing you to receive monthly passive income. Historically, annual returns have been anywhere from 8% to 12%, depending on the investment portfolio you choose.
When you sign up for their Starter Portfolio, Fundrise distributes your first investment across three eREITs:
The Heartland of the East Coast’s West Coast
Each REIT invests in properties around the United States in various geographic locations.
When you put in more than $1,000, you can invest in advanced plans that focus on specific real estate areas like Washington, D.C., or Los Angeles, or you can put your money into properties that Fundrise plans to sell after the value of the property goes up.
Roofstock, no. 5
Roofstock was founded in 2012 with the goal of making it simpler for investors to locate single-family rental houses to invest in. Roofstock offers a comprehensive vetting procedure for high-quality houses.
Joining Roofstock and seeing houses on the network is free, but investing in most of the properties will require a significant down payment.
With a setup fee of only 0.50 percent, the account costs are low. This makes them appealing to investors who don’t want to waste money on fees.
6. Consult with your real estate agent
Getting a real estate license may offer you an advantage in identifying possible rental homes, but if rental properties are going to be your side business, you can consult a realtor for advice.
Realtors have special access to MLS listings and private notes from other realtors, which lets them quickly check out properties.
Realtors may also get first access to leads that haven’t yet been added to the MLS. When trying to acquire rental real estate, you may need to think like a seller at times. To avoid the time and work it takes to set up an MLS listing, sellers will try to make private deals instead.
Every publicly listed home has an MLS sheet that includes the following details:
The asking price is
Appraisal value for tax purposes
What year was it built? Are there any distinctive features or amenities?
A brief history of the residence (i.e., repossessed, condemned, flood damaged, etc.)
A skilled realtor can also swiftly inform you which areas are best to search for houses in and what a reasonable price for a potential property is. A single talk with a local expert might sometimes be the most efficient way to speed up the search process.
Zillow is number seven.
An old-school way to find local rental property is to look through the MLS listings with your family realtor.
This approach is still quite successful, but you may use Zillow to perform your own investigation so you don’t waste your realtor’s time.
Zillow is a real estate website that allows you to search for properties for sale for free using the MLS listings. You may narrow down your local listings by amenities or location, such as:
The number of bedrooms
The size of the lot Schools in the area
Although the free property search websites are geared for purchasers searching for their new place to live, you may still use the same information to discover your dream house.
Trulia is number eight on the list.
Despite the fact that Trulia is owned by Zillow, you may prefer their UI.
You may also publish your rental listing to reach a larger audience of prospective tenants when you’re ready to start renting. It’s also free to view the active listings, much like Zillow.
Redfin, which is independent from the public MLS listings, is another online real estate marketplace to check out. Redfin may make it easier to find these homes, even though they may also be on the local MLS.
Because of the decreased selling costs, some sellers may be more inclined to utilize Redfin. Keep Redfin in mind since you never know where you’ll discover the greatest offer.
Craigslist is number ten.
Craigslist is extremely popular among private sellers since it is free to post a For Sale By Owner property. In the “Housing” option, you may browse through various different categories.
You’ll generally have the most luck with the Real Estate for Sale option, but if you can swap physical goods with the Housing Swap part, you could also get a good offer.
Facebook is at number eleven.
Another area to look for bargains is on Facebook. People will sell their homes and property tracts, as well as lower-priced items like vehicles, furniture, and clothes, if you join your local buy and sell organizations.
Even though there may not be as many options as with other house listing search engines, it will only take one listing to find the perfect investment property.
Find out about all the different ways to generate money on Facebook.
Your local newspaper
Even though most investment opportunities are online, you may still find some in the classifieds of your local newspaper.
At the very least, you’ll be able to obtain the inside scoop on what’s going on in your neighborhood, allowing you to identify hotspots and areas to avoid.
Take a stroll through your neighborhood.
Many real estate investors also travel around their areas and chat with their neighbors to identify the best offers. You may not only be paid to exercise, but you can also locate a property that has not yet been put on the market.
Some of the most successful investors and entrepreneurs “strike gold” by seeing an opportunity before the rest of the market.
Once a home is listed for sale, it is available to any realtor or would-be landlord. Because there is greater competition among purchasers, the asking price might be much higher.
Look for residences that seem to be unoccupied or in disrepair as you go about the area. You may knock on the door to check whether the owner is still in residence. If that’s the case, you may inquire about the possibility of a sale.
If the home is empty, look for property deeds or ask the neighbors if they know the owner’s contact information. Persistence pays off sometimes, and the one who asks first gets the deal.
14. Create an investment group for real estate.
You might also attempt to organize a real estate investing group based on your local contacts. Instead of paying full price for a rental property, you may divide the cost with other investors.
Although you will not get as much rental revenue each month, it might make the difference between receiving passive income and having your money sit in a savings account.
You can use the knowledge of the other people in the group to make sure you get the best rental property and save money.
These abilities might include business knowledge or DIY repairs, so you don’t have to pay contractors out of your rental money.
Purchase a REIT exchange-traded fund (ETF) or mutual fund.
If the idea of owning your own rental property is scary, or if you want to get your money right away, you could invest in a REIT (Real Estate Investment Trust).
REIT investments are the least expensive and take the least time, but they also have the least potential for making money.
You can buy REIT ETFs, mutual funds, and individual stocks with your regular investment account, but you can’t do that with eREITs from Fundrise or Rich Uncles.
The following rental properties may be purchased using REIT stocks and ETFs:
Residential, commercial, industrial
Cellular phone towers
To start, you might want to invest in a REIT index fund like VNQ or SCHH to lower your investment risk and get exposure to a wide range of real estate industries right away.
Regular REITs have the benefit of being liquid. Although you should purchase and hold for the long term, since you are investing in real estate firms that receive rent from their tenants, you may buy now and sell tomorrow if you have to. Investment property isn’t always easy to sell, and it could take years to get your money back.
The value of your investment is reliant on the current stock price, and the payouts are less than private investments, which are two disadvantages of public REITs. Using private platforms such as Fundrise and RealtyShares, you can expect to earn a dividend yield of 8% to 12%.
Public REITs normally pay out a 5% or 6% dividend, but those profits might be lost if the share price falls faster than the payout.
If you acquire a REIT for $100 per share and it decreases 10% in value while paying just 5% in dividends, you’ll lose money until the share price rebounds.
With free investing software, you may avoid paying fees and invest in REITs for free.
The Best Places to Buy Rental Properties
Because you’re a local expert, your greatest city for buying rental real estate can be your own. You already know a lot about the best neighborhoods and schools, as well as incoming employers, local laws and rules, and fair prices for homes.
If you’re comfortable owning rental property in a different state or time zone, you may want to look at a couple of these landlord-friendly places.
In most circumstances, it is preferable to purchase a single-family house in a desirable community. The cities listed below are good choices for single-family house rentals.
These cities have a few things in common:
There is a strong labor market with a number of significant firms.
Cities with a large population
Home prices that are affordable
You’ll find it simpler to attract renters, and your property won’t seem as though it’s empty. Despite the fact that certain major cities have high house prices, these markets nonetheless allow for a high cap rate.
Perhaps you’ll merely utilize the attributes of these cities to locate possible homes in nearby cities. Also, while purchasing your first home, remember to be patient. Using the advice in this article, you may find a lucrative property.
Orlando boasts the country’s fourth biggest real estate market, yet you can still get a quality house for less than $200,000. This popular tourist destination is also drawing a large number of full-time inhabitants. Orlando is a great place for investors because the city is growing quickly and homes are cheap.
Jacksonville, Florida It is a city in Florida.
The Port of Jacksonville has enlarged its area to accommodate the projected increase in marine traffic as a result of the Panama Canal expansion. Four Fortune 500 companies have their headquarters in Jacksonville, as well as a prominent medical community. There’s a lot to enjoy about this seaside city, which has a decent cost of living and an above-average rental rate.
According to some estimates, 100 new people migrate to Nashville every day! Nashville is no longer a quiet southern town. It now has several college campuses and large companies in the medical and auto industries.
Indianapolis is a city in Indiana.
Indianapolis is three hours from Chicago and boasts a cheap real estate market as well as a strong bioscience, technology, and transportation industry. With rental property in this metro region, you can invest in America’s heartland.
Houston, Texas (TX)
Houston is the fourth largest city in the United States, and it is home to NASA as well as a slew of energy and health-care businesses. Houston’s population is also expected to have expanded by 10% since 2010, compared to just 4% for the whole United States over the same time period. This rise in the population might be a dream for landlords, since not every new person will buy a home.
Grand Rapids is a city in Michigan.
For the midwestern area, Michigan boasts a low corporation tax and a decent cost of living. Grand Rapids has a lot to offer, such as a median home price of $175,000 and a number of large furniture and medical companies.
In recent years, the Phoenix, Arizona metro region has seen significant development and a promising employment outlook. The town of Mesa is a good area to start looking for a home. Despite the fact that the typical house price is $233,000, it is less than the average Phoenix metro median home price of $253,000.
Although Boston has the highest property costs on our list, the city is growing. The job market is expected to improve, and property values are expected to rise. You might not be able to rent in Boston, but it’s important to know that decent property can be found in any price range in a city with a lot of people and jobs.
How to Buy Rental Real Estate Successfully
Every real estate investor has their own “success recipe,” but there are a few things that all real estate markets have in common.
Placement, Placement, Placement
The location of your rental property is perhaps the most essential piece of advice. As a general guideline, consider if you would be satisfied as a renter if the positions were reversed. If that is not the case, keep searching for the next chance.
The worst home in a good area is nearly always preferable to the nicest house in a terrible neighborhood. Owning property in popular areas of town allows you to demand a greater rent and attract better renters. If your renters leave your property in a state of disarray when they depart, you may lose all of your earning potential. You will have extra hassles in addition to the possible financial loss.
Finally, if you decide to sell the home in the future, the value of your rental property may decrease as the poor location worsens.
Determine who your ideal renter is.
Different sorts of renters will be drawn to each rental property. A family with school-aged children, for example, will prefer to rent in a community with strong schools. College students are more and more likely to rent a small apartment close to their campus.
Affluent professionals are more likely to rent a home with a higher rent price than the typical income family can afford.
You should decide what kind of renter you want to live in your home and then look for homes that fit that description.
You wouldn’t invest in a company with a dangerous business plan, and you don’t want to rent to risky renters who may not pay their rent or cause excessive damage to your property.
You could also check rents for comparable houses in the area. You can’t charge San Francisco prices for a home in Toledo, Ohio, for example.
Your property will stay unoccupied if you are too high, and you will not receive rental money. You must also ensure that the rent covers the following costs:
Insurance on real estate taxes
Mortgage payment on a rental property
Repairs that have been planned
Rental properties are only a good investment if the earnings outweigh the expenditures over time. Make sure you can make a profit by crunching these figures before you make a purchase.
To Determine Your Cap Rate
The cap rate is maybe the most essential figure in renting real estate. The cap rate is a calculation that compares your expected revenue to your projected costs. To make the most money, you should aim for the highest cap rate feasible.
For unexpected repairs or vacancies, you may only want to buy rental properties with a cap rate of at least 8%. This is similar to how you could invest in stocks that pay a 5% annual dividend.
Here’s how to figure out what your cap rate is:
Make a budget for your yearly income and spending.
To determine your net income, subtract your yearly costs from your annual revenue.
Subtract the purchase amount from your net income.
Multiply the integer by a factor of 100.
This is the proportion of your cap rate.
If your net income is $12,000 and the purchase price is $70,000, your cap rate is 17.1 percent.
Depending on the upfront costs of purchasing a rental property, you may not make a profit at first. Maybe you’re thinking of purchasing a fixer-upper to rent out.
Rather than hiring contractors to perform the job, do as much of it as possible yourself. Installing new flooring, pressure washing the outside, or painting the walls are all possibilities.
You could save thousands of dollars if you took the time and used your handy skills to improve your cap rate.
When it comes to investing in rental property, first-time landlords should steer clear of fixer-uppers. Purchasing a move-in ready rental property (at the correct price) is a simple and stress-free way to start generating rental income right away.
Increasing the Profits From Your Rental Property
Being a successful real estate investor requires you to buy the perfect rental property. The second issue is to keep your investment property expenditures as low as possible.
This is why it’s important to do your homework and choose a property that has some of the following characteristics:
Property taxes are low.
Initial repairs are minimal.
Upgrades to your home should be kept to a minimum.
Avoid being sucked into a bidding battle.
You will have a short commute time from your house.
You must include all of the following fees in your tenant’s rent, particularly if you took out a loan to purchase the home. At the very least, your monthly rent must match your mortgage payment.
Remember that your time is equally as important as your money. You can try to find a home in the same area so that you can get to any emergency calls quickly.
Driving to another city—or even employing a property manager for long-distance properties—might not be worth the trouble if you get a good deal on a rental property.
Make sure you charge enough rent to cover your monthly expenses.
Setting your monthly rent charge at 1% of the property value is a good rule of thumb. With this approach, you would charge $1,000 per month on a $100,000 residence, but your local market may only allow a lesser proportion.
Compare similar rental rates on Craigslist to get an idea of your income potential.
Before you start taking applications for your first tenant, you should figure out your breakeven price by adding up the property taxes, insurance, mortgage payment, and any other monthly costs.
You should try to save up to 6% of your monthly income to pay for repairs and taxes on rental income in the months when you have to make expensive repairs or are between renters.
This is known as the “Cap Rate,” and it should always be calculated before purchasing any rental property.
Keep a record of your tax deductions.
You must keep a written or electronic log of your investment-related expenses because your rental income is taxable. Intuit Quickbooks will quickly become your best friend if you need to keep track of invoices and spending in real time and avoid a stressful tax filing process.
Although you should see a tax expert for specific guidance, the following costs are normally deductible:
Miles traveled in a car.
fees for cleaning and upkeep.
Insurance Fees for Homeowners’ Associations
Interest on the mortgage has been paid.
Fees for property management.
Taxes on real estate
You can also deduct utilities that are not paid by the tenant. The amount you can deduct varies depending on the type of rental property you own. You’ll have to prorate the deductions if you just live in part of the house or it’s your vacation home.
If your rental property is a separate piece of property that you don’t live on or visit, you can usually deduct the whole amount.
The most prevalent and cost-effective approach to purchasing rental property is via residential rental units. How and where you buy a rental property are two of the most important things that will affect how much you pay for it and how much you can charge in rent.
You might not realize how easy it is to become a landlord, whether you want to do it on your own and buy a property nearby or through an online platform.