- How to Make Money on Rental Properties
- Is a Rental Property a Good Investment?
- How to Start Investing in Rental Properties
- What Are the Benefits of Owning a Rental Property?
- What Are the Challenges?
- What Do I Need to Know Going Into It?
- How to Make Money on Rental Properties: Get Experience with Real Estate First
How to Make Money on Rental Properties
You see a place for sale and think it would make a fantastic rental property. However, before you plunk down thousands of dollars to become a landlord, you’ll want to make sure it’s a good investment. But where do you start? We’ll tell you what you need to know so that you can decide if buying a rental property is the right choice for you.
Must Read: Why I Quit Being a Realtor
Is a Rental Property a Good Investment?
Rentals definitely can be a great investment, if you do your homework and assess the property carefully. The idea behind any rental property is that it produces income above the cost of keeping it. Most people like buying a property that has the potential to appreciate over time, while their tenant pays the mortgage for them. But, knowing if it makes financial sense means you need to crunch the numbers to see if it’s really a good deal.
How to Start Investing in Rental Properties
Initially buying the property
Let’s say you want to buy a $100,000 condo. If you put down 20%, you would finance $80,000, and then add in all the other expenses needed to own it. Additional ongoing costs would include taxes, insurance, and HOA fees. If your holding costs equal $1,000 per month, that means, if you charge $1,000 in rent, you would, in theory, break even. However, this would only hold true if no surprise costs pop up.
Go with the cash flow
However, your goal is to make money on your rental property, not just break even. which means you want to look at your net cash flow after all your expenses are paid. This would represent your actual profit that gives you a positive return on your investment (ROI).
In order to get the most accurate cash flow number, be sure to include all the expenses, such as any utility or maintenance costs for the property. Even if these expenses only happen yearly, you’ll want to know exactly what you’re paying out in order to know your real bottom line.
Make sure your ROI is solid
For instance, if you charge $1,200 a month in rent and your expenses total $1,000 per month this would give you $200 per month in profit. This amount multiplied by 12 months would equal $2,400 a year. Your ROI would be $2,400 (net cash flow) divided by your $20,000 down payment to equal 0.12 or 12% ROI. This would be considered a high return as most investors look for an average ROI of 8%.
What Are the Benefits of Owning a Rental Property?
- Diversification of Investments
- Inheritance for your family
- Potential Retirement Home
- Passive Rental Income
- Tax Deductions for the Property
What Are the Challenges?
- Changes in Rental Market / Neighborhood
- Increased Property Taxes
- Maintenance of the Property
- Management of the Property
- Turnover of Tenants (Vacancy Rate)
What Do I Need to Know Going Into It?
Location, location, location
Just like any property, you need to ask if the location is a good one? Is it in a neighborhood that is desirable for renters, and what are the average rents in the area? You don’t want to buy in an area with high crime or low ranking schools because that won’t attract long-term tenants. A poor neighborhood choice leads to higher vacancy rates, and your income will stop for periods of time.
Condition of the property
Does the property need a major renovation to be livable? If you need to spend big bucks to renovate, you’ll need to factor that into your overall investment costs. You’ll want a good inspection report to tell you of any major issues that compromise the structure. You’ll also want to make sure everything works inside, as heat and plumbing aren’t optional features.
You’re the landlord on speed dial
If the kitchen faucet breaks and water is squirting out, you’ll be the one tenants call to fix it. Not interested in getting out your tool belt? Then you’ll need to hire someone else to do the job for you. If too many repairs are needed, this can become a big drain on your wallet.
Property management means loving details
If you don’t work with a property management company to oversee your property, you’ll be the one working directly with the tenants and taking care of all the paperwork. This includes drawing up a lease, processing their payments, and advertising the rental when it’s vacant.
Sometimes you have to play the bad guy
If your tenant is late with their rent and doesn’t seem interested in paying it soon, or if they damage your property, you’ll be forced to start the eviction process. This can be stressful and legally expensive, but necessary, to make your investment start producing income again.
How to Make Money on Rental Properties: Get Experience with Real Estate First
If you want to learn how to make money on rental properties, getting experience as an apartment locator can give you that first-hand knowledge to succeed. As an agent at one of America’s Top Workplaces, you’ll learn how to find clients, grow your network, market yourself successfully, and work with leasing offices. By knowing more about the legalities of the lease signing process and how the apartment industry operates, you’ll be better prepared to keep pace with a quickly evolving residential market.
AptAmigo is the best place to start and build a career in real estate. And, you can even earn uncapped commissions as you learn how to make money on rental properties.
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Jennifer Schmidt is a freelance writer in Vancouver, Washington, who specializes in real estate topics.