Real estate investments continue to be a great strategy for generating returns and building wealth over time. Rental properties in particular make for such a good investment because along with providing regular income to investors, they can also benefit from price appreciation. Owning and operating rental properties is not always as easy as HGTV makes it out to be though, and there are a few key things you should know before jumping into a rental investment. Continue reading as we explore some of the most important aspects of rental property investing to help you make the most of your next real estate project.
#1: How to Choose the Right Property
You can help ensure the success of your investment by dedicating time and effort into finding the right property. Consider economic indicators like population growth, and the job market of the town or city you are looking to invest in. Also, you should take a look at the neighborhood a property is in and its proximity to things like good schools, transportation, and shopping centers. These factors can have a strong effect on the level of demand for your rental units. Before making a purchase decision, be sure to hire a property inspector to uncover any hidden issues that may hurt your investment’s returns.
There are also two different types of rental properties you can choose from. Single-family homes are generally less expensive and easier to manage, but they also tend to have less of a return on investment. On the other hand, multifamily homes may have better cap rates, but they also come with the added burden of managing more rental units and tenants. If you aren’t sure you’re able to handle the extra work, you may be better off going with a single-family property to gain more rental experience.
#2: Analyzing your Return on Investment
There are a few key numbers you’ll need to obtain in order to evaluate a property’s return on investment. The first of which is Cash Flow, which is the amount of money a property brings you every month after expenses are considered. With rising ownership costs, it’s important to factor all expenses into your calculations including taxes, insurance, and things like HOA fees along with your monthly mortgage payment. As these costs continue to rise, they may eat into your profits, so it’s important to stay on top of them.
Another great number to know is your Capitalization Rate, which helps you determine the property’s yearly return. This is essentially your Cash Flow for the year divided by the purchase price of the property, with a healthy number falling in the 5-10% range. Ultimately, your goal with the property should be to maximize these numbers over time by reducing monthly costs and improving your rental units to boost income.
#3: Legal and Regulatory Considerations
You will want to make sure that you’re familiar with landlord-tenant laws in both your state and local jurisdictions. Laws surrounding lease agreements, security deposits, and property maintenance will vary from location to location. Adhering to these regulations helps ensure a good experience for your tenants and can also prevent you from dealing with legal headaches later down the line. It’s also important that you adhere to fair housing laws during the tenant screening process, and that you regularly get your property inspected to ensure compliance with building codes and safety regulations.
#4: Property Management and Maintenance
Along with the legal considerations, you’ll also need to dedicate time to delivering a quality experience for your tenants if you want them to stay at your property for long. This typically consists of checking in with your tenants regularly to address any of their concerns, and also keeping the property in good shape through maintenance and repairs. Showing your tenants you care will help with retention, and will also prevent smaller issues from ballooning into large repairs, saving you money. For large multifamily rentals, it may be financially viable to hire a property management company to take care of day-to-day operations for you, but you’ll need to compare the cost of such a service to your revenue to see if it makes sense.
#5: Rental Financing
You should know that you have multiple options when it comes to financing your rental property investment. There is always the traditional mortgage route, but this may not always be a viable option in every scenario. If you have less than stellar credit, or if the property is in poor condition and you’re looking to make renovations, a bank may view your investment as too risky.
Private money loans are another alternative. These are typically offered by lenders that operate in the real estate space, and since they are asset-based, your personal credit is less of a factor in approval. These loans may also be one of the only options available for financing real estate renovation projects.
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 a long-term rental property? Connect with us today.