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What is Rental Property Investment?

what-is-rental-property-investment

Whether you are looking to purchase your lifelong home or buy property to rent, the first step is to learn about the investment process. Investing in real estate requires a decent understanding of the market and the required capital. With that, purchasing rental properties can be a great way to generate passive income and set yourself up for long-term wealth. If you are determined to make a profitable real estate investment, check out the tips below to help you get started.

 Can I Buy Property to Rent?

Before we dive into how to get started in rental property investments, let’s first go over what they are. Investing in rental properties means that you’ve purchased real estate with the end goal of making a profit. When you buy property to rent, it’s much different from buying a personal residence for you and your family. Although there are many risk factors to consider, people who own one or more rental properties have the opportunity to produce income successfully.

That said, there are many steps in the process when you buy property to rent. It takes a lot of preparation, time, and money before you start to see a profit. Let’s go over some of the precautionary steps you should take before purchasing a rental property.

Evaluate Your Finances

Before starting the search for a rental property to buy, investors should thoroughly evaluate their financial status. It’s also vital to understand that financing an investment property is different than purchasing a family home. For example, on rental property mortgages, banks tend to have higher standards and more qualifications than buying a family home. Similarly, rental property owners must also have the money to cover extra expenses such as maintenance, emergencies, taxes, and more. Below are a few things to consider when buying your first property:

  • Establish a Budget- Before making a significant investment, it’s essential to know what you can afford. Once you determine this, stick with it—you don’t want to overextend your finances. After all, you want to account for all the extra expenses of owning a rental property.
  • Pay Existing Debt- If you have existing debt, it could help if you pay it off before investing. This can help you qualify for a loan and relieve stress by freeing up capital before making a significant investment.
  • Put Aside Money For a Down Payment- Plan to pay around 20% for a down payment on your investment. For rental properties, mortgage companies often have stricter standards. This is why it’s important to save up as much as you can before investing.

Getting Started in Rental Property Investing

Now that we’ve gone over the basics of finances, it’s time to look at some other factors to help get you started with your investment. Before you decide on a place to purchase, it’s important to look at the current local market, evaluate surrounding neighborhoods, and understand the development projections of the areas you’re looking to invest in.

Evaluate the Current Market

Location is one of the most important aspects to keep in mind when you buy property to rent. The location of the property is a massive factor in the potential profitability of your rental investment. Since the neighborhood can directly determine the property’s worth, investors should thoroughly evaluate the area before purchasing real estate. Similarly, figuring out the current market can help you find a good time to invest.

Research Surrounding Neighborhoods

Researching neighborhoods before deciding where to purchase is an excellent way to determine if the area will be profitable. To learn about the community, you should visit the area often, do your research, and ask questions to those who live there. Some things you’ll want to keep in mind include:

Understanding the Investment Process When You Buy Property to Rent

  • What is the average rental rate in the area?
  • What is the current crime rate in the area?
  • Are there local attractions nearby?
  • Is the area walkable?
  • Is the neighborhood quiet or noisy?
  • What are the taxes?
  • Are there good schools in the area?

You should have all these questions answered before you decide on a neighborhood to invest in. After all, choosing the wrong location for your rental property can seriously affect success and profitability.

Development Projections

Searching for areas that are up and coming is often going to be the best opportunity to make a profit when you buy property to rent. Looking at the development projections and the average income levels can give you a good idea of what the area is like and what type of tenants will most likely reside there. To do this, you can use online tools such as the Census Explorer, which lets you explore neighborhood statistics.

 

Once you’ve covered the bases of the local market, neighborhoods, and development projections, you’ll want to figure out how to make your rental property profitable.

Finding a Profitable Rental Investment Property

Once you have your finances in order and a good understanding of the location, it’s time to begin looking at properties. For this part, it’s best to team up with a real estate agent who has experience finding great investment deals. Trying to do this by yourself may be extremely difficult. Plus, experienced real estate agents have access to a wide range of tools and resources and can help you get in contact with the right people. When searching for a helpful real estate agent, look for these qualities:

  1. Efficient and Swift
  2. Committed to the Project
  3. Honest
  4. Helpful and Knowledgable
  5. Confident
  6. Prepared for Rejection

Once you’ve found an agent with the right level of experience and the desired qualities, it’s time to work together on finding the perfect property to purchase.Understanding the Investment Process When You Buy Property to Rent

Will My Rental Investment Be Profitable?

Whether your rental investment will be profitable or not depends on several things. For example, the location you chose, the current state of the property, taxes, amenities, and local regulations all play a massive role in how successful your investment will be. That said, investing in real estate does come with risk. Therefore, understanding how to evaluate the potential of a future investment property is also vital in maximizing your profits. A few basic rules and tips that every investor should know include:

  • The 1% Rule
  • The 50% Rule
  • Cash-on-Cash Return

The 1% Rule

Since the goal of investing is to produce passive income, you’ll want to acknowledge the profit margins. One easy way to do this is to follow the 1% rule, which states that the gross income of your investment should be equal to or greater than 1% of the purchase price. Keep in mind that the purchase price includes the property, renovations, taxes, and any other fees. Using the 1% rule is a good way to ensure that your investment can generate enough income to cover necessary expenses.

The 50% Rule

When you buy property to rent, the number of expenses you run into can be quite overwhelming. This is why it’s helpful to follow the 50% rule to determine your profit vs. your expenses. Investors should plan for 50% of total gross income to go toward property expenses. Some of the most common costs associated with owning rental properties include:

Understanding the Investment Process When You Buy Property to Rent

  1. Taxes
  2. Repairs and Renovations
  3. Regular Maintenance
  4. Vacancies
  5. Utilities
  6. Property Management Fees
  7. Insurance

Cash-on-Cash Return

Cash-on-cash returns are critical to a successful rental property. You can calculate this by dividing the annual net operating income by the original purchase price. To find your net yearly income, you can subtract your operating expenses from your gross income.

Remember that the equation doesn’t account for extra expenses like mortgage payments, emergency repairs, or other costs. That said, you’ll want to have a cash-on-cash return of at least 8% to 12% to establish a profit.

If you need help crunching the numbers, check out this free rental property calculator to help you.

How Can I Maximize My Investment Potential?

When you invest in real estate, you are taking a risk. There is no guarantee of success, but there are ways to initiate it. As you purchase more properties and build a diverse portfolio, you’ll want to consider utilizing professional management. After all, if being a landlord to one rental home can become a full-time job, imagine how busy you would be if you owned multiple properties.

Hiring a full-service management team is a great way to alleviate stress and create a wonderful rental experience for your tenants.

How to Find a Reputable Property Management Company

Finding a reputable property management team can help you save time, money, and stress. However, it’s crucial to find one that fits your needs and business goals. The right team will consist of industry professionals who are experienced in property management. Before deciding on a management company, consider looking into the property-to-employee ratio, their experience, and what they specialize in.

Luckily, Bay Property Management Group experts offer full-service management throughout Maryland, Pennsylvania, Virginia, and Washington D.C. Whether you have one property or many, BMG can provide you with several management services at a low monthly rate. Just some of the services we offer include:

  • Tenant Screening
  • Maintenance and Repairs
  • Rent Collection
  • Eviction Services
  • Rental Registration
  • Bookkeeping
  • Regular Inspections

So, if you are looking for a management company near you, Bay Property Management Group is here to help. Check out our complete list of services on our website and give us a call today.