Rental Properties - The basics and how to get started

Dave Seymour
July 11, 2020

Real estate investing is not as simple as it seems and covers a broad spectrum of options. Some of the options are a more passive stream of generating income such as Real Estate investment trusts (REITs), Private Equity Funds, and Real Estate crowdfunding platforms, whereas other approaches require more active participation.

Investing in rental properties is an active approach since it needs constant engagement and effort on the part of the investor. In this article, we will discuss what is involved in operating a portfolio of rental properties and the advantages and disadvantages of it.

Income Properties

If you’re opting for keep a property for rental income, you can earn a few basic types of returns. To begin with, the value can be increased by upgrading the property,and in the long run, the real-estate will appreciate. The equity will also grow as a result of the improvements made by the owner as the mortgage is paid down.

In addition, you can generate a stream of income by renting out the property to tenants. The monthly return should be more than the expenses required to maintain the place.

The rental property approach can be a lucrative form of earning income as long as the property can generate cash-flow, and the investor manages the property well on his own or in collaboration with a property management company. Of course, like any other form of investment, real-estate also has risks and losses involved.

Determining the Return on Investment

To figure out a viable investment strategy, you should ideally have a fair estimate of the income a property is likely to generate. The Return on Investment on most properties can be determined by deducting costs from the total profit. If you have a stock investment and have paid, say, $10,000 for a stock that you resell at $11,000,your ROI is 10%, and the net profit earned on it is $1000.

This is a basic way of understanding ROI, and it is usually not this straightforward. Various factors, such as capital-gains and broker fees need to be included before you can estimate accurate returns.

To accurately determine the ROI for an income-generating property, you will need to rely on historical data of market rental rates, factor in the expenses required to run the place, and maintain it and have a look at vacancy rates of similar properties in the area.

Determining a Good Rental Property

There are a number of factors to consider if a property is a viable investment. If you are looking for a property in a particular area, some basic calculations will be able to help you in determining if it will be able to generate an income. Make sure that the rent earned on a property is greater than your mortgage payments,expenses, and other miscellaneous overheads needed for its maintenance.

Buying rental properties

When buying a property for rental purposes, all overhead and expenses must be taken into account for an accurate estimate of cost and income potential. The list of expenses includes mortgage fees, repair and maintenance costs, insurance,utilities, property management fee, and, last but not least, your time and traveling expense going to and from the property. The taxes, legal fees, and tax-return prep expenses should also be included.

There are a lot of unforeseen costs that can incur; therefore, the more prepared you are, the better. When putting down all of your expenses, it is a good idea to overstate a little to compensate for accidental costs.

Buying and Financing a Rental Property

Financing rental properties is different from financing a primary residence. It is more challenging as the down payment required for both vary. Investors are supposed to put down at least 20% for financing a rental property.

There are plenty of financing options you can choose from. An interesting approach is the ‘seller’or the ‘owner financing’, where the owner plays the part of a bank or a mortgage company, and the investor pays a monthly amount. This approach is similar to how mortgage arrangements work, and credit worthiness of an investor is taken into account in the same way as a loan borrower.

One of the ways to finance the down payment is by using a primary residence or another property as equity.

Buying and Financing a Vacation Rental Property

Another way of going about a Rental Property is to invest in a vacation home. Although it sounds exciting, the mechanics of financing such a property are slightly different and challenging. Since Vacation Homes involve short-term tenants,they will most likely not be occupied throughout the year, and your income stream will not be constant. This is why rents of vacation rentals are high so as to keep the cash-flow positive for the whole year. You cannot take a break from paying the mortgage; therefore, keeping the rent high will compensate for the period of vacancies.

Apart from repairs,maintenance, and cleaning costs, the advertising costs will be slightly higher and constant in order to bring in tenants regularly. There will also be more time and effort required to ensure that the ads are fulfilling the objectives.

Vacation Rentals are high-risk investments and require constant effort and active involvement from the investor.

How we’ll help you get started in real estate investment?

What we’ve discussed may look complicated to you, but that’s alright. We have a lot more resources that take a deeper look into the numbers and operations of real estate investing. Not only will we inform you about the risk factors and potential of each type of investment option, but you will also know exactly what an investment entails so you can make an informed decision.

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