How to Get into Rental Properties
If you're planning to get passive cash flow for years to come, you have to consider rental properties! Here's an article to help you get started.
The first thing that you will need when starting investing is to own some sort of property. Then the idea is that you will gain income from it, usually through renting it to a tenant. You can either invest through commercial property, or residential.
No matter what specific method you use, renting out an investment property is one way of generating income for yourself. It can be daunting and seem complex to get started, but once you know the basics, its is not that difficult. If you follow these tips, you will be on your way to being a true real estate investor!
Table of Contents
What is the Difference Between Commercial and Residential Rentals?
If you do decide to start investing in rental properties, you have a decision to make. Do you purchase a residential property or a commercial property? Both will result in rental income, but the process and how they are managed are what will be different.
A residential rental is less complex and is the most common method for first time investors. Most people would have rented at some point in their life. Investing in a residential rental property is simply going from being the renter to the landlord. You will purchase a property (whether it be a house or an apartment), and then rent it out to an individual. They will pay you rent, and this is how you will make your money.
Commercial real estate investing is the purchasing of a business or a property designed to be a business. Such as an empty space at a strip mall. You will then lease out the space to a business, who will then use the space as they see fit.
What is the Process for Getting into Rental Properties?
The first and most important step in getting into rental properties is to own one. And the only way that you can own a property is to purchase one. And to purchase a property, you are going to need some start up capital. Most people will get this capital through a home loan with a big lender such as a bank, but you will need a down payment.
The necessary down payment for a home loan is likely going to be your biggest hurdle in getting into rental properties. Investopedia explains that investment properties generally require a larger down payment than owner occupied, as the risk is perceived to be greater. So, you will need on average 20% of the purchase price. This large cost is why many beginner investors will start with smaller and more affordable rental properties and work their way up when they start building their income.
Final step in the process is to find a tenant to pay rent, which will cover your expenses and even make you some profit. Reliable tenants can be hard to find, so it is advised to go through an agent as they will work to find the best tenants for you. The agent will also manage the day-to-day management of the property.
How to Make Money from a Rental Property?
As already mentioned, you will earn money from rental income. Whether it be through a residential or commercial property, it is the same idea. You own the property; someone used the space and pays you for it. The first step is of course owning the property. You could choose to purchase it as a sole proprietor (you would be the sole owner), or as a joint, or through a trust.
Once you decide what type of property you want to invest in, you will need to purchase one you can afford. Finding a tenant to occupy the space and pay you for the privilege is the most important step and will be what makes the purchase into an investment. You then need to manage the property and ensure that your costs do not outweigh the rental income coming in.
Benefits of Investing in Rentals
The main benefits of investing in rentals is mainly financial. It is a good way to start in the investing world and make a bit of extra money while you are at it. Fool.com state that many real estate investors will start in the rental market. They provide consistent and dependable cash flow through rental income, and there is additional value from appreciation. Investors also get tax incentives and can claim deductions through money spent on your rental property.
Investing in a rental property is more than just a way to make money. It is very satisfying to know that you own something and can bring people a sense of security. Even if the rental situation does not go as planned, at the end of the day you still own the property and can always sell it if needed.
What Are Some Mistakes to Avoid?
Like anything in the field of real estate investment, rental properties are not without risk. There are some common mistakes that are made by investors, especially first-time ones. Real Wealth Network list the main mistakes as being:
- Starting too large. Start with one smaller property, and once you have the hang of the rental process, then you can think of expanding.
- Not doing research when purchasing. Do not purchase the first property you see, especially without getting it inspected and appraised. Otherwise, the costs associated with fixing it up can ruin any potential rental benefit.
- Hiring bad property managers. Property managers or agents are a must have, especially for those not familiar with the rental market. Do not make the mistake of getting the cheapest agent on the market. A poorly managed property can end up costing you a lot!
Getting into rental properties can be very fulfilling and financially rewarding if it is done properly. It may seem simple and straight forward in theory, but mistakes and mismanagement can be costly. If you are interested in entering in the real estate investment world, then getting into rental properties is an exceptionally good place to start.
Charles is the founder of infoSpike.com. His real estate investing experience started in 2004 and he is currently focused on rental property projects. He enjoys learning about real estate investing, personal finance, and marketing. Read more about Charles here.