It’s believed most millionaires made their vast fortune via real estate. And rental property is the asset that pays you just like a business. Follow the simple 3 step process below and you might be able to invest wisely in rental income properties.
More millionaires made their fortune in software, with solutions that help businesses scale up their services and revenue. Would it be a reach then to say that buying high revenue rental properties and then using software to manage them could be a good way to build a fortune?
Can You Still Get Rich from Buying and Managing Rental Property?
Investors have done well in rental properties and there is a big demand for rental properties given the housing shortage. You can check out the rental market in the US yourself. Investors earn from the growing value of the property itself (e.g., apartment building, or multifamily blocks) and of course from rent paying tenants.
For many investors/landlords there are additional financial benefits too including tax deductions, eco-grants, and the opportunity to add extra money making services.
There’s a lot of questions you need to be asking before you dive in and buy properties such as:
- which type of property is affordable?
- which type of property will generate the best ROI?
- which are the best cities and neighborhoods to buy in?
- what are the carrying costs, insurance, and other fees associated with rental properties?
- where will I get financing for this type of venture?
- what level of rent price is ideal?
- how much cash flow do I need from all my assets?
- should I hire a property manager to take care of the tenants and property?
- what are the legal requirements in service, safety, and regulatory compliance?
- what are the perils if the tenant ruins the unit or can’t pay their rent?
- how much will it cost to get the unit(s) ready to rent?
- who do I hire to inspect the property and advise on buying it?
A lot of questions and I don’t know that we answer them all here. For you, questions about investing in one rental house and subdividing it, or whether to buy multiple apartments in different locations, hinge on what kind of profit you’ll receive.
It’s all about earning a return, otherwise there may be better investments elsewhere.
Everyone looks at rental property investing in a positive light. For the last 10 years, property prices have skyrocketed, so everyone was almost guaranteed a profit. But now, prices are very high and not rising as much. It seems only wealthy investors can buy enough units to raise their profit margin and get a good return.
Is There a Sure Fire Property Investing Formula?
If you follow a series of appropriate steps to get yourself ready, you can choose better properties and avoid disasters. Buying a cheap apartment in an old building might seem safe, but it may be located in a building with mechanical equipment and utilities that will need constant repair. And the neighborhood might scare away good tenants.
Everyone is looking for lots of cheap units, but they are cheap for a reason — no one else wants them. Your formula might read: education + good quality building and unit + good neighborhood + easy management system.
One. Getting Educated
If you’re a new investor in real estate, great. There are property investing courses such as Udemy.com, books such as Nolo’s Every Landlord’s Guide to Managing Property which has lots of tips and practical advice, online forums such as biggerpockets, and even some online videos such as this one from Roofstock.
The educational element helps you learn about the different classes of investment, what to look for in properties, measure borrowing costs, analyze your balance sheet and cash flow, discover your property management needs, and learn what perils exist. Always eliminate surprises.
The educational inputs will boost your confidence and help get you focused on what to buy.
Two: Decide on Type of Property and the Best Neighborhood
Here’s some tactics that might keep you from making poor decisions:
- buy a Class B property. within a working class neighborhood in a big city that is near common business district, or a suburb where new apartments are being built
- only buy 10 to 20% below market value. Many smart real estate buyers never buy unless they get a good deal. Overpaying for rental properties isn’t wise.
- set 10% ROI in cash as a goal (total rent minus mortgage and monthly operating expenses)
- rent should be at minimum 1% of the price of the property
- buy properties where you can do repairs and renos yourself, otherwise you’re at the mercy of costly and hard to find contractors and projects that get way out of hand
- buy properties that are close in proximity, or in the same building to reduce the time it takes you and your contractors to get to them
- set aside money for rehabing fixtures, floors, or buying new appliances
- ensure you have at least 4 months of cash reserves to handle debt and unforeseen repairs
Okay now you’re better educated and you’re ready to buy a worth property that will produce good cash flow.
Three: Take Property Management Seriously
To manage the units, you’ll want a good landlord software solution to help you manage your bookkeeping and accounting, along with managing the everyday financials, and transactions.
As part of managing tenants, ensure your take renter screening seriously. Before you buy, visualize the type of tenant that is in these buildings already and who your tenant will be. This will help you set the correct rent prices, and write ads that will attract the right tenant for you.
Use a tenant screening service or forms that help you see and understand the characteristics of good tenants. And of course, follow city and state guidelines related to screening.
You can learn much more about property management at ManageCasa. Ongoing management of tenants and your property might be more time consuming than you expect. Landlords complain frequently about how much time they must spend on administrative tasks, tenant conversations, showing and onboarding. Good software will help you tame that beast.