How To Get Into Buying Rental Properties
But there's a lot to consider, from rising mortgage interest rates to local markets to finding reliable tenants. There can also be surprise expenses. Here are some answers to common questions about buying rental property:
how to get into buying rental properties
A lot can go into setting up your rental property, including insurance, homeowners association fees, utilities, advertising, cleaning, repairs over time, rising mortgage payments and taxes are some critical factors, to name just a few.
You should always consider property taxes when buying an investment property. High taxes will eat into your profits, while low taxes will allow you to keep a larger amount of your rental income each month.
Rental property investment refers to the investment that involves real estate and its purchase, followed by the holding, leasing, and selling of it. Depending on the type of rental property, investors need a certain level of expertise and knowledge to profit from their ventures. Real property can be most properties that are leasable, such as a single unit, a duplex, a single-family home, an entire apartment complex, a commercial retail plaza, or an office space. In some cases, industrial properties can also be used as rental property investments. More commercial rental properties, such as apartment complexes or office buildings, are more complicated and difficult to analyze due to a variety of factors that result from the larger scale. For older properties, it is typical to assume higher maintenance and repair costs.
There are several ways in which rental property investments earn income. The first is that investors earn regular cash flow, usually on a monthly basis, in the form of rental payments from tenants. In addition, as with the ownership of any equity, rental properties give the investor the possibility of earning profit from the appreciation, or increase in value over time, of the property. Unlike rental income, a sale provides one large, single return.
When purchasing rental properties with loans, cash flows need to be examined carefully. Rental property investment failures can be caused by unsustainable, negative cash flows. Cash Flow Return on Investment (CFROI) is a metric for this. Sometimes called Cash-on-Cash Return, CFROI helps investors identify the losses/gains associated with ongoing cash flows. Sustainable rental properties should generally have increasing annual CFROI percentages, usually due to static mortgage payments along with rent incomes that appreciate over time.
Generally, the higher an investment's IRR, CFROI, and cap rate, the better. In the real world, it is very unlikely that an investment in a rental property goes exactly as planned or as calculated by this Rental Property Calculator. Making so many financial assumptions extended over long periods of time (usually several decades) may result in undesirable/unexpected surprises. Whether a short recession depreciates the value of a property significantly, or construction of a thriving shopping complex inflates values, both can have drastic influences on cap rate, IRR, and CFROI. Even mid-level changes such as hikes in maintenance costs or vacancy rates can affect the numbers. Monthly rent may also fluctuate drastically from year to year, so taking the estimated rent from a certain time and extrapolating it several decades into the future based on an appreciation rate might not be realistic. Furthermore, while the appreciation of values is accounted for, inflation is not, which might distort such large figures drastically.
Buying and selling (sometimes called real estate trading) is similar to rental property investing, except there is no or little leasing out involved. Generally, real estate is purchased, improvements are made, and it is then sold for profit, usually in a short time frame. Sometimes no improvements are made. When buying and selling houses, it is commonly called house flipping. Buying and selling real estate for profit generally requires deep market knowledge and expertise.
The costs of doing any mortgage loan these days are much higher than they used to be just a few years ago. And non-owner occupant (NOO) investment properties are even higher. Small dollar loans, like under $100,000, have very high fees as a percentage of the loan amount. Possibly up to 5% when you add in the loan origination points, fees, appraisal, underwriting, title insurance, escrow costs, etc. But the present rates are really very competitive and you can get NOO financing at 4.5% on a 30-year amortizing loan these days. And that is dirt cheap, locking in a 30-year low interest rate loan on a rental property.
The biggest and most common risk that real estate investors need to consider is high vacancy rates! Tenants will be the primary income source for all your rental properties. So, if you want them to make money, you need to keep your property occupied!
Location is everything when it comes to real estate investing. So, you should always take this into consideration before you buy a rental property. Some areas may look like a great choice for a rental property because of low prices and high occupancy rates. But in a lot of cases, these numbers may be because the area is either undeveloped or has a high crime rate.
If taxes and insurance costs go up faster than your rental income, you will have a decrease in cash flow. Insurance companies will adjust claims in case of a catastrophic event, so it can be seen as one of the downsides of investing in rental properties.
The next step in your real estate analysis is to analyze the properties themselves. Investment property analysis starts by estimating the monthly rental income which you can expect to get from your short-term rental based on the average occupancy rate in the market and the predominant daily rate.
Make a list of the one-time, startup costs as well as ongoing expenses related to buying and owning a rental property. This is the only way to make sure that your property will yield positive cash flow. Do not ever settle for a property with negative cash flow or which barely breaks even, in hope of better luck soon. Only invest in favorable cash flow properties.
This is one of the largest barriers to rental homeownership because it can be challenging for many people to save that much cash. You may be able to finance your down payment cost through a personal loan, but that additional interest will cut into your profits. Another option would be to convert your current home into a rental and buy a second home as your primary residence.
Calculating your ROI will allow you to compare similar properties and make a smarter buying decision. Understanding your ROI will also help you determine if a rental property is a better use of your money than other investment modalities. According to Investopedia, a 6% first-year ROI is considered healthy because that number will likely rise over time.
Buying a vacation rental property is an incredible way to invest in real estate, offset some homeownership expenses, and enjoy your favorite vacation spot as a second home. These properties can generate high rents, but they are seasonal and have high operating and maintenance costs. Learning how to invest in vacation rentals will require in-depth knowledge of local markets, financial calculations of income and expenses, and an understanding of the real estate buying process.
If you want to buy a rent-ready vacation property with a property management company, consider investing in turnkey real estate through Roofstock. With Roofstock, you can browse properties with existing tenants and property managers in around 40 different rental markets. This allows you to find the right property and receive rental income immediately.
Hiring a property manager is an excellent choice as they plan and execute activities and understand what goes into routine, seasonal, and preventative maintenance. They keep property rentals in good condition by advertising and filling vacancies, negotiating and enforcing leases, and maintaining and securing premises. They also set rental rates by surveying local rental rates and calculating overhead costs, depreciation, taxes, and profit targets.
For busy property owners, purchasing property management software is also an option. Property management software simplifies online rent payments. It eases landlord management of rental properties with its robust features like online marketing, digital lease signing, online rent payment, tenant screening, and maintenance tracking.
Passive Recurring IncomeThis is the dream that most people have when they look into buying rental properties; to create an extra income stream that shows up monthly and does not require much ongoing effort. But for some investors, it might be a while before this dream is realized. Unless you are paying cash for the property, putting a very large amount up as a down payment, or getting a bargain on a foreclosure, fixer upper, or something similar, you probably will not see much income in the short-term.
Speak with a Local Financing Expert for More DetailsAs you can see, owning rental properties offers several advantages for investors, but there are some drawbacks to consider as well. If you are thinking about buying real estate to rent out, the first thing you should do is find out what types of financing options you have available and can qualify for. Interest rates are still at or near record lows, and the real estate market is strong, so it is a good time to consider this type of investment. To learn what financing programs are available in your area, speak with your local lending specialist.
Use this table when you are using the GDS 27.5-year option for residential rental property. Find the row for the month that you placed the property in service. Use the percentages listed for that month to figure your depreciation deduction. The mid-month convention is taken into account in the percentages shown in the table. Continue to use the same row (month) under the column for the appropriate year. 041b061a72