Investing in real estate can be a great way to earn a living by collecting passive income. However, purchasing this property may break your bank if you don’t prepare and adequately save up for it. Part of being successful in the real estate industry is planning and organizing so you don’t go above your spending means.
Rental property investments are known to be quite lucrative for almost anyone if they are done correctly. The first step is to save up and do your research on what it takes to make your first investment. When investing in real estate, you need to prepare for both planned and unplanned expenses. Things like maintenance, damages, and renovations tend to pop up when you least expect it.
If you’ve purchased a home for yourself, it’s important to note that investing in a rental property will be much different. After all, the goal is to make money off of your investment. So let’s go over the ways a rental property is profitable, the 1% rule when it comes to investing, and some financing options that you may want to look into.
Are Rental Properties Profitable?
Yes, rental properties can be highly profitable – if done correctly. Unfortunately, it takes a lot of time and saving before it becomes manageable. So, what can you do to make sure you’re doing things right? It doesn’t hurt to reach out to other investors to figure out how they managed things. Especially if you’re starting your first rental property investment, you’ll want to get some tips on how to save, what expenses to watch out for, and what financing options may be available to you.
Building relationships in the investment scene is a great way to prepare for your first real estate endeavor. If you want to know exactly what to expect, you can reach out to a helpful real estate professional or a rental property manager. Along with that, forming relationships with contractors and other maintenance professionals can help, so you know you have a reputable vendor to turn to if things start to go wrong with your property.
Reaching out to utility companies may also be beneficial to get a good idea of what the monthly billing will look like in your rental unit. This may seem premature if you have yet to secure your investment, but it will likely pay off once you look for tenants to fill your unit. Most will want to know what their monthly payments will look like. In order to make your property profitable, you must have a good understanding of the expenses that will go into it from the start and build up a good amount of savings.
What is the 1% Rule for Rental Properties?
It can be challenging to estimate the expenses that will come along with a rental property. Some investors use the 1% rule to evaluate a broad maintenance repair budget. If you are following this formula, you can anticipate annual maintenance costs of around 1% of the total price of the home. For example, if your rental property costs $160,000, then you would want to save $1,600 for basic and routine maintenance needs.
Another rule that investors have come up with is the square footage formula. If you’re following this savings method, you’ll save $1 for every square foot of the property. So, if it’s 2,000 square feet, then you’d want to save $2,000 for anticipated repairs and overall maintenance.
It’s important to understand that these are estimated costs and not actual repair costs. Maintenance, renovations, and other costs can pop up depending on the age of the home and other factors. Along with maintenance and repairs, you should also consider saving up for long-term vacancies or tenant damages.
Financing Your Rental Property
The biggest part of investing in real estate is figuring out how you are going to finance your investment. Without exploring your financing options, you may be left with higher bills than you were expecting. Luckily, there are a few different avenues you can explore when it comes to financing your real estate investment.
Before you contact your financial experts such as an accountant, your banker, or a financial advisor, you’ll want to see how much you have to put toward your investment. Know that you’ll need at least 20%-30% for a down payment, which doesn’t include the closing costs. Consider using a mortgage calculator, which can help you determine these types of costs.
Once you have a ballpark idea of what it will cost you just for your initial real estate investment, it’s time to start saving up. To do this, you should have a good understanding of your current expenses and create ways to save up enough cash for the entire process.
Common Expenses to Prepare For
It doesn’t matter if you own one property or many; Your end goal is almost always positive cash flow or passive income. To pull this off in the most successful way, there are tons of things you must consider. Once you get your finances figured out for your initial investment, next you’ll want to think about the other expenses that come along with a rental property. You’ll be responsible for a lot of things when you become a property owner, better yet a landlord.
Just a few expenses you’ll be responsible for when you own a rental property include:
- Taxes – As you probably know, when you invest in real estate, you have to pay taxes. During this time you should look into any tax benefits that could be applicable to you.
- Mortgage – When you buy a rental home, you still have to pay a monthly mortgage. It’s important to figure out how this will be covered. Most investors set their monthly rent at a rate that will cover this expense.
- Maintenance and renovations – When you start, your rental property may need some work. Because of this, people tend to invest in properties that aren’t “fixer-uppers”. Either way, after a few years of normal wear and tear, you should expect regular maintenance as well as renovations. Things like appliances, fresh paint, or new flooring expenses can creep up on you quickly.
- Short-term or long-term vacancies – Landlords should actively prepare for unexpected vacancies in their rental homes. Whether it’s short-term or long-term, it’s best to come up with a comprehensive plan to cover home-owning expenses without a monthly income from tenants.
- Property management fees – Most successful rental property owners hire a property management team to help manage their day-to-day tasks. While it’s extremely beneficial, you have to pay the cost.
One thing you should always avoid is going over your budget. This may leave you in a tough financial spot that could affect your business and personal life. However, if you prepare correctly and plan to cover these types of costs, you should be able to earn an income from your rental property.
How to Get Started Once You’ve Saved
As I’m sure you can tell by this article, investing in real estate is no easy task. It can be challenging. A ton of time and effort is required to make things run as smoothly as possible. Luckily, there are some tips and tricks to make your workload seem a bit less overwhelming. Typically, the first step is to come up with a well-thought-out plan. But, with that said, it’s not as simple as it sounds.
While coming up with your plan, you should prepare to include business professionals with whom you will work closely. This may consist of an accountant, a financial advisor, and a banker or mortgage broker. These experts can help you with all things finances and help you make the most thoughtful decisions with your money.
With getting help from these professionals, you’ll likely have a smoother buying process and a more positive rental property experience.
Your investment plan also needs to include smaller investments that you may not think about immediately. For example, new appliances, lighting fixtures, flooring, and fresh paint are all staples when it comes to revamping a rental home. Not only that but these repairs and renovations can also boost the value of your property.
Is Hiring a Property Manager Worth it?
Unfortunately, owning a rental property can quickly become a full-time job, especially if you are doing it independently. Since most people aren’t able to dedicate all of their time towards their rental properties, it’s common for multi-property investors to hire a property management team.
Owning a rental home comes with lots of time and strenuous work to ensure that things are constantly running correctly. Luckily, you don’t have to take on all of the work yourself with helpful resources such as local property managers.
With the help of a property manager, you can have assistance with the daunting tasks that come with owning a rental property.
Some of the tasks that are common for your management team to handle include:
- Collecting rent payments
- Maintenance of the overall property
- Screening potential tenants
- Targeting potential tenants
- Knowledge of state and local property laws
- Navigating compliance requirements
- Financial reports
If it sounds like you may need help with some of these tasks, you should consider hiring a professional to manage your rental investment.