The real estate market has its ups and downs, but owning rental properties is one of the safest, most reliable ways to build toward financial independence. It’s a long-term process, but every success story starts somewhere. This step-by-step guide to building wealth with real estate breaks it down so you can begin right away.
Although you won’t be able to quit your day job just yet, investing in real estate is an exciting and tangible way to grow your money. Prepare yourself to put in some time, hard work, and money, which will mean sacrifices along the way. Keep in mind the big picture. There are too many pros to pass up investment properties:
- The steady rental income.
- The tax benefits.
- The property value increasing.
- The option of selling whenever you want to.
- The possibility of eventually retiring to the property.
- The chance to pass the property on to the next generation.
- The potential to buy more properties and diversify your portfolio.
Save for a Down Payment
Your first property will probably not be your most impressive. You’re starting with few—if any—funds. Put away what you can, and educate yourself about financing. Banks are usually amenable to loans for single-family rental properties. If you can’t afford that, there are special opportunities for loans for owner-occupied multi-family properties. You’ll have a place for yourself to live, you can rent out one or more units in the building, and the bank will give you its blessing.
Find Your First Property
Take your time learning what to look for in a rental investment property. You can’t do too much research because so many factors go into sizing up a property: location, schools, crime, amenities, job market, development potential, and much more. The more you learn, the easier it will be to recognize when a good deal pops up. In the meantime, crunch the numbers and crunch them again so you’ll be sure you can charge enough rent to cover your costs and make a profit. It’s hands-on training that will apply to all your future investments too.
Make Some Upgrades
Conduct a rental property analysis so you’ll have an idea of how to optimize your profits. If you’re not happy with the numbers, you can take a month or two to get the property in better shape. If you’re at all handy, you can make the unit more appealing to quality tenants and even raise the rent. Do as much maintenance yourself as you can, although it’s also key to know your limits. If you get in over your head with plumbing, for instance, you could end up doing more damage than good. Focus on remodeling the front entrance, kitchens, and bathrooms, because that’s what tenants are looking at. But don’t take too long—you’ll want to get your place rented out as soon as possible.
Choose the Right Tenants
This section title is a little tongue-in-cheek, because it can take a lot of experience before you learn to trust your gut about people. You may not be a natural-born psychologist/private investigator/psychic, but if you follow all the recommended due diligence, your tenant screening will be more successful. You can save time with a clear advertising strategy and by stating your policies upfront. You can rule out inappropriate candidates and spend less money on background checks. Eventually, you’ll learn to recognize red flags, but in the beginning, you’ll have to gather as much information as you can.
Build Your Team
Even if you just have one property, it pays off to assemble a team that can help you out:
- An accountant. You’ll need someone who can go over your numbers and advise you on what you can afford. They’ll alert you to any tax breaks you deserve.
- A lawyer. Someone with an interest in real estate can tell you what you need to know about the Fair Housing Act and landlord-tenant laws, and make sure your rental lease is airtight.
- A property manager. You can’t start looking for a good property management company soon enough. If you’re hoping to build wealth, you’ll be buying more properties that require more energy and time. Consult a manager before you need to, because you’ll be surprised by how much you can benefit from their expertise. They can help you screen tenants and even alert you to great real estate opportunities in the area.
- Vendors. You’ll want trusted service people who will respond quickly in an emergency and charge you a fair price.
- A network. Start mingling with people like yourself who can compare notes with you and exchange tips. You can find investment communities online, or real estate enthusiasts through local organizations.
Invest in the Next Property
There are a lot of surprise expenses the first time you buy a rental property, even if you think you’ve prepared yourself for any eventuality. You might be surprised at how little your cash flow is in the beginning. But you could save the rental income until you have enough for a down payment for your next investment. Or you can build up equity, get an appraisal, and ask your bank for a cash-out refinancing. You’ll find a lot of strategies for raising money, such as borrowing against your IRA or leveraging credit cards. Just don’t take on anything too risky; if you keep an eye out for great deals like short sales, foreclosures, auctions, and fixer-uppers, you may not need as much money. It might also be a good idea to create an LLC to protect your assets.
Increase Your Holdings
Grow your portfolio as you get comfortable with the properties you have. Cover yourself by buying different kinds of rental properties in different areas. Your cash flow won’t multiply until your properties do, and real estate can be a slow-moving investment. If you’re too conservative in your approach, it’ll take a long time. Stay alert for real estate opportunities, because they don’t come along just when you want them to. If it seems like the right time to sell a property, use those profits to invest in the next one.
Real estate has so many aspects that it’s impossible to master them all. If you’re enjoying what you’re doing and moving toward full-time investment, use your experience to get ahead. A step-by-step guide to building wealth with real estate will only take you so far before your own intuition and ingenuity take over. Our advice:
- Be proactive about keeping tenants happy for longer-term leases.
- Research techniques for maximizing occupancy.
- Reanalyze rents and adjust between tenants.
- Earn your real estate license to act as your own listing agent.
- Read real estate books and ask questions of other investors.
- Monitor the market and delve into predictive analytics.
- Invest money back into your properties to increase rents and their value.
At R. Russell Properties, we’ve been an integral part of many success stories. If you’re looking for rental property management in Winter Park, Florida, or the central part of the state, we can give you even more location-specific guidance on the real estate market. Let us help you on your way to financial independence with our hands-on help. We’ll be proud to say we knew you when you were first starting out!