Everyone has to start somewhere, and here you are, ready to buy your first property. And even if you’re not thinking far ahead, owning just one rental unit can supplement your income every year with thousands of dollars. Learn about investing in real estate with this beginner’s guide and you’ll be on your way.
Why Rental Properties?
Real estate is such a good investment because, as Scarlett O’Hara’s father explained, “It’s the only thing that lasts.” (He also recommended fighting and dying for it, but that won’t be necessary.) The beauty of renting out your property is that you can generate a regular monthly revenue stream while your property is appreciating. You’ll see both short and long-term benefits.
Once you get the hang of your first property, you can use your profits to pay off the mortgage, improve the property, or invest in more. A portfolio of diverse real estate assets is a time-proven path to enough passive income for true financial independence. You can choose from a large variety of properties (single-family, multi-unit, etc.) and different ways to rent it out (seasonally, longer leases, etc.). In time, you can try as many options as you want.
Start With a Plan
For the greatest amount of success, map out your goals ahead of time. What are you doing it for? Do you want to generate just a little extra money so you can eat out more, or are you trying to pay for your kids’ college? Would you like to retire at 50? When you set goals, you can plan the steps you need to achieve them, milestone by milestone.
Decide What To Invest
This is a tough question, and we’ll warn you: don’t get in over your head. The market doesn’t always follow the playbook, and things can go wrong with a property, too. On top of a down payment for your property, you’ll need a fund for improvements, repairs, maintenance, insurance, and so on. Separate your personal finances from your business finances and save what you can. But don’t wait too long; there are investment opportunities at every level. Before you seek financing, put your house in order:
- Check your credit score
- Calculate your income-to-debt ratio
- Estimate the amount you have for a down payment
- Consult with a loan broker
Before you start looking for a land deal, you should be prequalified by a bank and know what financing options you have. You might be surprised. Among the possibilities:
- Loans from banks
- Loans from the government
- Private money
There are also strategies like “house hacking,” which means buying a multi-unit building, moving into one of the units, and renting out the rest. Then, you can qualify for a residential loan.
Find a Property
Try to find a million-dollar property for a bargain-basement price. It’s a long shot though, so do the next best thing. Gather data, crunch numbers, and survey the landscape. And when all the planets align, you pounce. But first, narrow down the location to the neighborhood that seems most promising. Ask:
- What makes it favorable?
- How are the schools?
- What’s the job market like?
- What’s the vacancy rate?
- Is there any commercial development in the works?
- What neighborhood amenities are there?
- How are the crime statistics trending?
From there, you can home in on the properties for sale, or wait for the right one to pop up. Keep an eye on your numbers. The property has to justify enough rent to generate a profit that can get you to the next step of your financial plan. Look at comparable units, forecast your cash flow, research repair costs, and get a feel for demand in your market. A fixer-upper can turn out to be a brilliant move—or a money pit if you don’t know what you’re doing. Don’t get too emotionally attached to any opportunities. Don’t pounce until you’re confident it’s the right time.
Set the Rental Rate
There’s a sweet spot, and it’s up to you to determine it. Hunt down any comparable properties in your real estate market and asset class. How does your unit hold up? What condition is it in? How old is it? You need to find the magic rental amount that will draw potential tenants while maxing out your profits. There’s no point in sticking to a rent that’s too high if your investment ends up sitting vacant. Take stock of any extra amenities to calculate if they’re worth more rent:
- A nice view
- Lots of natural light
- Outdoor space
- Athletic facilities
- Storage space
- Washer and dryer
These features can add up to more rent for you. Or you might want to consider upgrading the property to make your unit more competitive.
Take a look at your investment plan. Is your main goal to be a landlord, heavily involved with advertising, tenant screening, maintenance, and late-might emergency calls? Taking care of a rental property can prove satisfying and rewarding, but be warned that it’s at least as time-consuming as taking care of your own home. There’s a lot more to renting a property than watching the money roll in every month.
Is your financial plan more ambitious? Does it look past this first property toward an impressive portfolio of diverse real estate investments? In that case, the sooner you run your property like a business, the better. Learning firsthand how to manage a rental is valuable experience, but it can distract you from your larger goals. Instead of getting bogged down in day-to-day details and duties, you should scout out your next investment opportunities.
Even a beginner’s guide will tell you that investing in real estate is a full-time job. If you already have a job, a family, or other interests, constantly supervising your property might not be the best use of your time. In that case, seeking out a company like R. Russell Properties will set you up for future success. We specialize in property management in Windermere, Florida, and throughout the center of the state. For a small cut of the rent, we’ll take care of your investment so you can focus on the big picture.