Investing in rental property as a way to generate income can prove lucrative for savvy investors. However, like any other type of investment, it does not come without risk. Mitigating this risk takes preparation, planning, and know-how. So, to get you started, we assembled the top 10 tips for successful real estate investing along with answers to investor’s burning questions. Continue reading to find out more and jumpstart you on the road to added income!
10 Steps to Successfully Investing in Rental Property
As COVID-19 holds down interest rates, at least for now, many investors are looking to take advantage of the market. However, low rates and limited inventory make the field of buyers very competitive. Investors need to do their due diligence, have a budget, know their target ROI, and have the capital to move quickly. Let’s review 10 easy steps to get you prepared to make some great deals!
- Work on Your Finances First
- Steer Clear of Foreclosures
- Look for the Up and Coming
- Assemble a Dream Team
- Fight for the Best Possible Price
- Renovate, but Upgrade Thoughtfully
- Setting the Right Price
- Leverage Responsibly
- Accounting 101
- Hire Professional Property Management
Work on Your Finances First Before Investing in Rental Property
In real estate, cash is king! Even if you do not start with your own cash, your finances will need to be in good order for a bank loan. Banks are far more critical when mortgaging investment property. Therefore, real estate investors must have excellent credit and a sizable down payment to have the best approval opportunities and favorable rates.
Start by checking your own credit report and work to correct any errors you may find. If you have a history of late payments, this is an area to work on before investing. Factors of an excellent score and prompt payment history appeal to potential lenders.
The next step is to build cash on hand. There are many ways investors can do this, such as cutting expenses to save more. However you choose to stash some cash, it is needed for both the higher down payment banks will require and to cover needed expenses for closing, inspections, renovations, and licensing. An emergency fund is also essential; this helps cover any large or big-ticket repairs such as a roof leak or HVAC going up.
Steer Clear of Foreclosures
Popular TV shows have made buying foreclosures and renovating for huge profits look easy. In reality, this is not where a new investor should start. While an “as is” property may meet the goal of “buying low,” it could end up costing big in the long run. Purchasing rental properties as an investment counts on them being filled by a renter sooner rather than later. Thus, buying a foreclosure can lead to many unexpected issues, costing investors both money and valuable time.
Some standard renovations and cosmetic upgrades are commonplace in rentals but never take on more than the experience you have. Unless you have a sizable portfolio or the capital on hand to sustain through extended vacancy time, steer clear of major fixer-uppers. Remember, you get what you pay for, and a low purchase price is not always a sign of high-profit margins.
Look for the Up and Coming
Rule #1 of real estate – location, location, location! This is especially vital with rental properties as some areas that appeal to buyers do not necessarily draw the same number of renters. Therefore, the time needed to evaluate a neighborhood’s potential carefully cannot be overlooked.
The goal is to find an up and coming area on the path to further expansion, economic growth, and a prospering job market. Areas that have businesses and corporations moving in instead of out will draw people in need of housing. Additionally, locations with a large student population due to neighboring universities provide a much-needed influx of potential residents. Using local market data, comparisons, and average rental rates, investors can determine what they can comfortably spend to achieve the ideal ROI. These factors will help narrow and focus your search.
Assemble a Dream Team
Yes, investors can choose to go it alone, but why? Partnering with an experienced realtor that is knowledgeable in finding property for investment is crucial. Thus, opening a whole new world of opportunity. Especially in today’s market, timing is everything. Investors need to have their financial plan set to act on great deals as they come quickly. However, finding those deals is not always easy. A licensed realtor has the industry contacts needed to give investors the competitive edge they need. Remember, two sets of eyes hunting for deals are always better than one.
Seek out an agent who is highly responsive, aggressive, and willing to write many offers. Real estate investing is different than the more emotional counterpart of buying an owner-occupied home. In investing, you have a budget, and that budget is based on meeting a certain ROI. You may likely be writing and negotiating quite a bit back and forth. Also, if the price is driven too high, investors need to walk away and on to the next deal. Therefore, a realtor with some investment experience is definitely a plus.
Pro Tip: Looking for more advice? Check out our blog on how to choose the best investment-friendly realtor for you!
Fight for the Best Possible Price
To investors, profit margins are a driving force in deal decision making. While everyone wants to buy exceptional value for a low price, that is not always easy. The key here is to look for properties that are priced reasonably that an investor can add value to. That means, very rarely or ever, will you be buying a brand-new home.
This is where knowing your comfort level regarding renovations is critical. Look for properties that are priced right with the renovation or upgrades needed that match your particular skill set. By performing some common upgrades such as repainting, new appliances, flooring upgrades, or new bathroom fixtures, investors add both rental and resale value. These more modest changes early on pay off much higher than if you were to buy a foreclosure or “gut job” that could lead to the unexpected and high added cost.
A licensed realtor can provide additional home value research and comparisons to other homes in the area, both currently on the market and recently sold. All of this should be taken into account when making your final decisions. Below are a few other items to consider when weighing whether a property is a good deal or not.
- What should my ROI be when investing in rental property? – Ideally, an average acceptance rate of ROI is between 10% and 15%.
- How do I know if a rental property is a good investment? – Many investors turn to the 1% rule as a guideline. This means that the monthly rental rate (gross before expenses) should equal or be greater than 1% of the purchase price to be profitable. So, if the area your potential deal is in does not support these figures, consider moving on.
Renovate, but Upgrade Thoughtfully
Rental renovations and upgrades will differ somewhat from what is common for owner-occupied units. Properties with consistent turnover have a higher rate of wear and tear. Therefore, renovations should focus on the following:
- Durability – Due to the added wear and tear rentals face, durable finishes and materials are a must. For example, the carpet may be cheaper initially, but consider the cost over time. Carpet is difficult to clean and shows its age fast, especially in high traffic areas. In a rental, carpets will likely need to be replaced after every other tenant, which can add up quickly. Alternatively, think about investing in hardwood, laminate, or tile in high traffic areas. Although this is a greater initial investment, investors will reap the rewards long term.
- Cost to Added Value Ratio – Not every renovation choice will add value to a renter. So, focus on simple changes that make a big impact. One of the easiest is added storage via custom built-in closets or floating shelves. For a small output, property investors have added much-needed storage any renter would appreciate. Another great investment is upgrading bathroom fixtures, adding a washer/dryer, or refreshing the paint. These are all items you can highlight in marketing to draw in qualified renters.
- Mass Appeal – Speaking of qualified renters, basing your renovation decisions on mass appeal is vital. Remember, the owner’s personal style should not take center stage in a rental. The idea here is to provide a stylish yet clean slate for future tenants to make their own during their time there. Therefore, design and finishes should stick to neutral colors in pleasing grey, beige, soft greens, or pale blue.
Pro Tip: Need color advice? Check out our blog on the best 2021 design trends for your rental property.
Setting the Right Price
Many new landlords stumble when it comes to pricing, either starting too low or too high. Proper pricing requires some due diligence and evaluation of your local competition. Once your property is renovated and ready to go, other homes currently listed provide the best source of pricing estimates.
The goal here is to match your price to those similar on the market with comparable specifications. Keep in mind, renters likely have many options, and they are looking for value as well as amenities.
Pro Tip: Looking for a quick way to get an idea of rental rates? Check out this free online rent estimator from Zillow.
One way to use the increased value from renovations to recoup costs is to refinance. That said, there must be a balance between reasonable leverage and over-aggressive actions. It is tempting for investors to keep their money working by using leverage especially if you need capital to manage unexpected issues.
That said, remember that the real estate market has its ups and downs. Be mindful not to overextend yourself, and before leveraging, make sure you have these other safeguards in place below:
- Own your own home
- Maintain a cushion of equity before investing in rental property
- Set up emergency savings funds for unexpected big-ticket items
Accounting 101 for Investing in Rental Property
Basic accounting and expense tracking knowledge are key to an investor’s success. There are several facets to accounting functions that define the difference between average and lucrative investments. If you are not knowledgeable in this field, consider hiring a CPA. Investors can use their expenses and property values to their advantage come tax time, but only if they know-how.
Tracking expenses, invoices, rent collection, taxes, vendor payments, and account balances is a time-consuming task. Therefore, free up your valuable deal chasing time by leaving this to a qualified professional who can maximize your tax benefits and save you money.
Hire Professional Property Management
Successful investors realize that managing a rental property, or several, is a full-time job. To achieve high returns, it takes the constant evaluation of expenses versus rental value and maintaining quality tenants by minimizing turnover. A reputable property management professional will take the guesswork out of long-term goals while handling day-to-day operations. Thus, investors are freeing up time to focus on growing their portfolio or just sitting back and collecting rent without the stress.
Pro Tip: Unsure what traits are important? Check out our blog for tips on finding the best property management solutions.
Are you investing in rental property and looking for expert Washington DC property management services? Turn to a company that successfully manages over 3,000 units across Maryland, Southern Pennsylvania, and Washington DC. Bay Property Management Group is the area’s leader in full-service rental management, from marketing to maintenance and all aspects in between. Our dedicated staff includes experienced property managers, leasing professionals, along with in-house maintenance, marketing, and accounting services. Offering a 6-Month Tenant Guarantee and less than 1% eviction rate, if you need to fill your new income property with a qualified tenant, look no further than Bay Property Management Group Washington, D.C. Give us a call today!