Invest in Rental Property
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 spend beyond your means.
Rental property investments are known to be quite lucrative for almost anyone if they’re 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 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. 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 an effective 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. 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’re 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 crop up, depending on the age of the home and other factors. In addition to maintenance and repairs, you should 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’re 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 into 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. Generally, there are various ways to obtain funds to finance your investment. Apart from setting up a savings account, you can take advantage of traditional loans, lines of credit, home equity loans, and other relevant financing options that suit your needs. By considering these things, you can prepare enough funds to buy your first rental property.
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 a lot of things you must consider. Once you get your finances figured out for your initial investment, you’ll want to think about the other expenses that come along with a rental property. You’ll be responsible for plenty 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.
- Insurance– When you manage a rental property, you certainly need to buy insurance coverage to protect your investment. As a landlord or a rental property owner, having residential landlord insurance is important. It provides coverage for certain financial losses caused by malicious damage by tenants, accidental damage, disasters like fire, earthquake, lighting, and other similar situations. Hence, if you’re buying your first rental property anytime soon, make sure to set aside some money for your insurance coverage. Remember, when your property is insured, you can rest assured that your insurance can offer financial support and minimize uncertainties in your investment.
- 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 lot 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 it’s not as simple as it sounds.
While coming up with your plan, you should work closely with business professionals. This may consist of an accountant, a financial advisor, and a banker or a mortgage broker. These experts can help you with all things finance and help you make the most thoughtful decisions with your money.
By 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 boost the value of your property as well.
Is Hiring a Property Manager Worth it?
Unfortunately, owning a rental property can quickly become a full-time job, especially if you’re 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 a lot 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 available, such as local property managers.
With the help of a property manager, you can receive assistance when performing 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
- Maintaining the property
- Screening potential tenants
- Targeting potential tenants
- Sharing knowledge of state and local property laws
- Navigating compliance requirements
- Providing financial reports
If it sounds like you may need support with some of these tasks, you should consider hiring a professional to manage your rental investment. With them at your side, you’ll feel reassured that an experienced and trustworthy property manager can take care of your investments and help you save money in the long run.
Investing in a rental property can be challenging, especially if it requires a huge amount of money. Without proper financial planning and organization, you won’t be able to get the investment you want. Rather, you’ll end up wasting money in the long term. Thus, if you’re looking to save for your first rental property, keep the information mentioned above in mind. After you’ve saved enough money to fund your real estate investment, you can start maximizing profits.