Investing in property is on the mind of many people these days. However, there are some common obstacles that people face and tips to learn along the way in order to be successful. Rental investments can have amazing advantages when conducted correctly.
However, when it comes to investing in rental property, there is so much to think about that it tends to get overwhelming at times. With so many things to take into consideration, it’s important to step back and go over all the steps and aspects of owning a rental property.
For one example, you should be aware of your local and national competition and likewise, you will want to get to know the area in which the property is located. With that, there are many more considerations that go into place when investing.
Whether you own just one property or multiple, property management takes a lot of time, patience, and effort to be conducted correctly and efficiently. If you are just starting out with your first rental property investment, you should be sure to fully understand the buying process, do your research into things like landlord insurance companies, and have a plan for your purchase.
Rental Property Investment
Is Owning a Rental Property Worth It?
First of all, before you purchase your first property, you’re going to want to ask yourself “Is it worth it?”. Although owning a rental property is a great way to make money, it must be conducted correctly and efficiently in order to really pay off.
Property owners make money whenever tenants pay their rent payments and whenever the value of the property appreciates. With that, there are also significant tax benefits and advantages that are attractive to most property owners.
Four ways your rental property can benefit you include:
- Positive cash flow – Ideally, the total number of expenses is less than the total money coming in.
- Tax benefits – Benefits like depreciation allow owners to offset certain expenses as well as mortgage interest.
- Appreciation – Although not guaranteed, if a property is held onto for a number of years, it may go up in value.
- Amortization – Funds like monthly rent payments contribute to paying off your principal mortgage and as years go by, the mortgage gets paid off faster.
Purchasing a rental property can be a reality for anyone. But executing it correctly is vital to successfully buy and hold onto a rental property investment.
Before making the dive into purchasing a property, you should first go over some of these common questions, tips, and considerations to avoid any mistakes or mishaps during your investment.
What Is the 2% Rule in Real Estate?
When it comes to real estate, there are many rules that investors may live by in order to get the best rental properties. One of the most commonly talked about rules of real estate is the 2% rule.
Being one of the most famous guidelines when it comes to investing, the 2% rule is used to find the most profitable properties.
But what does it mean? The concept of the rule is to only purchase properties that produce monthly rent of at least 2% of the total purchase price of the home.
To determine if the property is worth purchasing, multiple the purchase price by 0.02. If it’s listed at $200,000, you would want to collect at least $4,000 in rental payments monthly to correctly follow the 2% rule and have a successful investment.
Although not guaranteed, the 2% rule is a good way to be able to securely cover all the expenses that come with a rental property, such as vacancies and maintenance.
Tips For Purchasing Your First Rental Property
Investing in anything, especially real estate, is not something you should just jump right into without having done it before. Understanding the buying process, knowing your competition, and being fully aware of your finances are just a few things to consider before thinking about purchasing a property.
As an investor, the end result is obviously positive cash flow. However, that’s best done with all considerations taken. Make sure you come up with a comprehensive purchasing plan and don’t be afraid to hire a property manager or management company.
A few things to consider before making your rental property investment include:
- Create a plan
- Know your property’s location
- Scope out your competition
- Become fully aware of your finances
- Contact a property manager
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Create A Plan First
There’s no secret to it, and anyone would tell you: Investing in real estate can be tough. A lot of work, time, and effort go into smoothly purchasing a rental property.
However, there are many ways that you can make your workload seem less daunting. The first step is to come up with a plan.
Within your plan, you should include all of the business professionals that are utilized in securing the property. This may include your accountant, a financial advisor, and your banker or mortgage broker.
With the help of these experts, you are sure to have a successful buying process and a positive rental property experience for years to come. However, your plan shouldn’t stop with just your banking needs.
Your plan should also include smaller investments such as renovations or other home improvements. New appliances, lighting, and flooring shouldn’t go ignored if they need replacing. Along with fresh paint, these upgrades can help improve the value of your property.
When purchasing a rental property, you should also plan for things like maintenance and vacancies, along with any other smaller issues that may arise.
Inspect Your Property’s Location
Inspecting the overall location of your real estate is extremely important before making the purchase. Without knowing vital information such as what the neighborhood is like, if there are schools nearby, or what the crime rate is like in the area, it’s hard to determine if the purchase will ultimately pay off in the end.
For reference, here are some things that prospective tenants look for near their homes:
- Low crime rate
- Job opportunities
- Shopping centers
- Major freeways
All you need to do in order to obtain this information is a little research. Thinking like a prospective tenant may give you a different point of view. What do you look for in a home? Take these things into consideration to ensure the safety of a quality tenant.
Be Aware of Your Competition
Some would say it would be naive to go into a purchase without scoping out the competition that you’re up against. What are the best home values and purchase prices on the market? Does it align with your potential purchase? Looking into your local and national competition can help you get a better idea of what you should be paying for your investment.
Your local competition can give you a good sense of a fair property price for your location. If other alike properties near yours are not similar in price, it may not be a wise decision. At the end of the day, you should be able to cover your mortgage while still making a profit.
With that, being aware of your national competition can just give you more assurance of your buying price. You should know if you’re getting a good deal if prices are alike on the market.
When you know your budget and purchase goals, at the end of the day, you’re looking to make the smartest and most responsible decision. The end goal is to ensure capital growth over time, so observing the market and securing the best deal should be the first thing on your mind when making an investment like this.
Be Aware of Your Finances
Whether you are a new or experienced real estate investor, the end goal is always positive cash flow. However, in order to do this successfully, there are a ton of things to first consider when it comes to money that you spend in the process.
Here are just a few of the expenses that you will be responsible for when owning a rental property:
- Taxes – When purchasing a property, you should look into any tax benefits that may be applicable to you.
- Mortgage – How will this be covered? Do monthly rent payments from tenants cover this expense?
- Maintenance, repairs, and renovations – Appliances, fresh paint, or new flooring expenses can creep up on you quickly.
- Short-term or long-term vacancies – You should prepare to cover either short-term or long-term vacancies in your rental home.
- Property management fees – Hiring a property manager, while extremely beneficial, can add extra expenses as well.
To avoid going over your budget, it’s vital to take things like these into consideration while investing in real estate. If done efficiently, rental properties can provide consistent cash flow without making extreme investments.
Contact A Property Manager
One of the downsides of owning a rental property is the strenuous work that takes place to make things run properly. At times it can feel like a full-time job itself. Luckily, with resources like your local property manager, you don’t have to take on all the work yourself.
With the help of a property manager, you can have assistance with the daunting tasks that come with owning a rental property. Some of the tasks that can be lifted from your shoulders are:
- Collecting rent payments
- Maintenance of the overall property
- Screening potential tenants
- Targeting potential tenants
- Knowledge of state and local property laws
- Navigating compliance requirements
- Financial reports
At Bay Property Management Group, we provide full-service management for your rental property at a low cost to you. No team works more diligently and efficiently to meet your rental property requirements and your financial goals.
If you live in or around the Baltimore area and need help with your rental property or have any questions, contact your local property management company today.