A Beginner’s Guide to Long-Term Rental Real Estate

Rental real estate continues to be a great place to invest your money and build wealth over time. Aside from the obvious benefit of steady income, there are many advantages to investing in rental properties. There are tax write offs, equity, and even passive income potential to name a few. Have you been considering investing in a rental property, but you don’t really know where to start? Continue reading for our beginner’s guide on investing in long-term rental real estate.

Understanding Long-Term Rental Investments

Long-term rental properties make for such good investments because there is always going to be demand for quality housing, in any market. This characteristic allows real estate to grow in value over time, often keeping up with or exceeding the negative effects of inflation. In fact, during market downturns real estate tends to hold its value and can even continue to grow. Besides that, many of the expenses associated with operating a rental property, such as loan interest and repair expenses, can be deducted. Of course, this does not mean that every real estate property will make for a good investment; you’ll still need to conduct due diligence and carefully compare your options before making a purchase decision.

Getting Started: Set Investment Goals

In order to be successful in real estate investing, it helps to have clearly defined goals for what you’re trying to achieve. For example, a rental property is going to need to be managed, but you can always hire a property manager to effectively turn your investment into passive income. If your goal is simply to build wealth over time, this might be the strategy for you. However, if you want to maximize your income, you’ll be managing the property yourself. You also need to consider the investments proximity to you. You don’t necessarily need to have a property close by that you can manage yourself, but you will need to assess your personal risk level to determine if you’re comfortable with this type of investment.

By setting clear goals, you have an actionable target to direct all your efforts towards, and it helps you cover all your bases by giving you a plan to follow. The more detail and effort you put into defining these goals, the more likely you are to find success.

Conducting Market Research

Every good real estate investment starts with a dedicated amount of time to market research. Not every city or town is created equal, and some will be vastly more profitable than others for a rental property investment. By taking a look at key stats like property values, population growth, vacancy rates, and the strength of the job market, you can get a better idea of how healthy the market is overall. In order to obtain accurate statistics on real estate markets, we suggest working with a trusted data aggregator such as ATTOM Data or REiDEAL MASTER.

Choosing the Right Property

After you have decided on the market you’ll be investing in, it’s time to begin searching for the perfect property. The same things that make a home desirable are what will make for a good rental investment. Generally, people want to live in quiet areas that have access to good schools, amenities like stores and restaurants, and different transportation options. You can tell a property will be lucrative if its located in one of these areas, but how can you tell exactly how profitable an investment will be? Comparing the cash flow and cap rate of different properties allows you to make better informed decisions.

Cash flow is defined as a property’s total monthly income minus total monthly expenses. It’s the simplest and quickest way to get an idea of a rental’s profitability. Cap rate takes this one step further, and you can calculate it by taking a property’s Net Operating Income (essentially its yearly cash flow) divided by the property’s current market value. It tells you what percentage of the property’s value you are returned each year by operating the rental. Finally, before moving forward with a purchase, be sure to order a property inspection to uncover any costly issues that can disrupt your investment’s profitability.

Financing Your Investment

You have a few options to choose from when it comes to securing financing for your rental property. A mortgage loan from a traditional lender, like a bank or credit union, is always an option. These loans come with favorable interest rates, but on the other hand they also come with an extensive application process and strict loan criteria. That means if you don’t have perfect credit, or are dealing with a time sensitive situation, it may not be the best fit for your scenario. Alternatively, you can seek out financing from private lenders that operate in the real estate industry. These lenders are often well established, offering similar terms to a bank, albeit at slightly higher interest rates. Plus, as these loans are often secured by collateral, your personal income and credit score are less of a factor for approval.

Managing Your Rental Property

Managing a rental investment can be somewhat overwhelming if you don’t have a good idea what you’re doing. You’ll have to take a few steps in order to ensure a smooth relationship with tenants. Start by drawing up an all-inclusive lease agreement that covers all your bases, including establishing policies on late payments, pets, and subletting. You will also want to ensure the property is well maintained, and you may even want to consider upgrades to areas like the kitchen and bathrooms, which tend to show their age. Beyond this, you should maintain regular communication with your tenants so you can quickly address any issues they have and stay on top of any necessary repairs. Following these steps helps improve your return on investment, and as you build trust with your tenants they will be more likely to renew their leases.

If you aren’t comfortable with the idea of managing your investment personally, you can always hire a property management firm to handle day-to-day operations for you. They can even handle tasks such as filling vacancies and collecting rent. Of course, you will have to compare the cost of the service to your cash flow to determine if it makes financial sense for your investment.

RCN Capital

The easiest way to save on rental property financing is to find a trusted lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Are you looking to purchase or refinance an investment property?