How to Invest in Rental Properties: Financial Advice for New Landlords

How to Invest in Rental Properties

Stocks and bonds and trusts… oh my!

There are literally a ton of ways to invest your money. And trying to navigate the investment landscape is difficult for those of us who don’t have a certification in financial planning.

But there’s one investment option that everyone understands: Real estate. You don’t need to know everything there is to know about it to invest in real estate. And it’s the best tangible way to put your money to work for you.

Investing in rental properties is a commitment. But it can also lead to a lifetime of financial freedom.

Here are some tidbits of financial advice for new landlords.

Start Small: Single-Family Homes

When you start a new venture, it’s a great idea to start with what you know. Single-family homes are the best way for any newbie to enter the property rental gig.

Why? Because they’re more affordable than other, more complex real estate ventures. And there’s a healthy demand for them.

Buying one home won’t put you into bankruptcy if you happen to fail at it. And when the economy dips, people still need places to live. So demand is always there.

Make Sure the Dollars Make Sense

Before you decide on a property, work the numbers. Does the property cash flow? In order to find that out, do your research.

Look at similar properties in the area to figure out an adequate rental rate for your place. You don’t want to overprice your rental property. That leads to early letdowns.

But you also don’t want to sell yourself short. Then, be honest about how much it’ll cost to own the property.

Add up your mortgage payment, property insurance, real estate taxes, and maintenance expenses. Always add in extra expenses as a contingency in case you lose your renter or need to do extra maintenance.

Now that you’ve got your total monthly expenses figured out, see if what you plan to ask for rent is worth it. Remember to take into account the time it’ll take you to get the property rental ready.

Does this property make money? And is that enough money to make you happy with the investment? If these answers aren’t “yes”, keep looking for a property that works.

The Perfect Property

The perfect property depends on your expectations, your location, and what your target renter wants. Here are some of the main types of renters:

  • College students
  • Young families
  • Professionals
  • Retirees

Talk to real estate agents and other property owners in the area. They can shed light on the best renters. Make sure you look at properties that suit these renter’s needs.

Choose a property that’s convenient to places like a shopping mall, a local college, or a business district. Buying a home near apartments is also a good idea. Apartment dwellers often look to upgrade to a home sooner or later.

For your first property, don’t buy a total lemon. Get something that doesn’t need thousands of dollars in repairs and three months of your time to get into rental shape. Find something that you can rent right away with a few cosmetic fixes.

Outdoor space is a great amenity. People renting single-family residences often look for those with great outdoor spaces.

Check out the neighborhood. Drive through it during the day and night to make sure it’s what you’re looking for.

After you’ve chosen a property that suits your needs and cash flows, get a property inspection. You don’t want to skimp on this process. Hire a professional inspector to dig up any red flags before you buy.

A Word About Financing

When you have your property picked out, you’ll need a way to pay for it. That’s where your financing options come into play. Here’s a great article about finding the best option to finance your investment property.

Banks are the traditional method of financing. But they aren’t the only places you can get money to finance your property. Keep your eyes open for the right financial backer for your investment.

Also, pay attention to fees and factor financing fees into your property costs analysis.

Put money down on your investment if you can. But not everything. Save some cash to do the necessary repairs to the property to get it into rental shape.

Find the Best Possible Renters

Advertising for renters is best done through several different outlets. Hang flyers in local areas with high traffic. Craigslist and online rental sites are a great way to start.

Social media is also a good way to reach a ton of people without costing you a ton of money. Once you have some renters interested, it’s time to grow thicker skin. As a landlord, you must be able to ask the hard questions of your potential renters.

Have all potential renters fill out a rental application. Check references, run the background checks, and credit score checks.

It’s not always an option to rent to someone with perfect personal credit. But it does show you if they’ve ever had any property related issues. And you want to avoid those who have collections filed by prior landlords.

Rental Properties: A Great Way to Invest

If done the right way, rental properties offer a great return on investment. Even when the economy is down, people need places to live.

As a new landlord, you want to start small. A single-family residence is the best way to dip your toes into the rental waters. It won’t take up too much of your time and it won’t bankrupt you if it doesn’t work out.

Do the math! If the math doesn’t work, move on to a different property.

Keep your target renter in mind. Improve the property the way this renter would want their home improved. This helps you maximize your investment.

Check with banks and other financing options, like mortgage brokers. And pay attention to financing fees. Once you’re ready to rent, screen your renters to avoid potential issues.