Rental properties are considered an optimal investment. This is especially true when they are purchased below market value. But it’s not easy and definitely not a get rich quick method. It is a process that takes time, a tremendous amount of effort, and a LOT of determination.
This brief guide can help you jump-start to your rental investment career. Continue reading to learn 5 tips for breaking into the rental property business.
Tip #1: Make Certain Your Return is Higher Than the Debt
Most investors have a small portion of debt associated with their investment portfolio; however, you should avoid investing in rental property until the majority of your debt has been handled.
There is only one exception to this. If your rental property investment will produce significantly higher profits than the debt which you are responsible for.
In that case, it may be a sound investment. Otherwise, you lose what many refer to as a “margin of safety”, which will cover any payments you must make towards the property that you purchase.
Tip #2: Obtain a Down Payment of 20% or Higher
Many mistakenly believe that they only have to put down 3% to 5% on rental investment properties. This amount is appropriate for properties that are owner-occupied.
For a rental property, you will need to come up with at least 20% down.
The approval requirements are also stricter than for owner-occupied properties. This mostly stems from the fact that mortgage insurance is not a requirement or even available for properties that will be used as a rental.
Tip #3: Avoid Flippers and Fixer Uppers
Many first-time rental property investors seek out a “flipper” – or, a fixer-upper that can be “flipped” for a profit.
You should avoid this. Renovations are extremely costly and time-consuming.
Instead, purchase rentals that only require minor work. In doing so, you will see your return on the investment much more quickly.
Tip #4: Determine Your Operating Costs
For a good rule of thumb, you should estimate at least 50% of your earnings as “operational costs” associated with your rental.
For example, if you charge $800 each month, you should set aside $400 for the operating costs to keep the rental going.
If this is not enough, increase the amount that you charge for rent until you are making enough to cover operational costs.
Whatever you do not spend out of that amount should be placed into a special bank account for those periods of vacancy or emergency repairs.
Tip #5: Hire a Property Manager
If you are new to the rental business, you may find yourself overwhelmed by all of your new-found responsibilities.
To avoid this, you need a property manager.
This professional can assist in property maintenance and repairs, screening tenants, collecting deposits and rent monies, and a multitude of other activities. While your rental property investment is the top-rated investment, the investment into a property manager is also highly rated.