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Real estate investments can help diversify your portfolio while creating an additional income stream. There are many different ways to invest in real estate, but most investors get their foot in the door with one or more rental properties. Getting started with rental property investments means understanding how to discover properties, how to purchase them and how to use them to turn a profit. It’s a bit more involved than other investing strategies, but there’s a solid reward potential if you’re open to learning the ropes!
The Benefits of Investing in Rental Properties
One potential advantage of investing in a rental property is that it has the possibility to provide two types of return. First, it can offer appreciation in the long run if the property value increases over time or if improvements are made by the owner. Second, the owner also has the potential to benefit from an ongoing return in the form of positive cash-flow on the investment, which is earned by renting the property out to tenants for monthly payments that exceed the owner’s overall monthly expenses to maintain the property.
If you can acquire attractive financing to secure a rental property that nets positive cash-flow in an appreciating market, and you are willing to take on the responsibility of managing the property, then rental property investing can be a valid strategy. Of course, it’s critical to understand that rental property investing carries the risk of loss and there are no guarantees!
What you need to know as a beginner investing in rental properties:
Be Prepared for Other Ownership Costs
Rental properties can be a very lucrative asset, especially when it comes to the location. And while rental income can help cover the usual taxes and insurance costs, there are other ownership costs that will come up along the way. Maintenance and repairs, for example, will need to be covered, and you may need to hire someone to maintain the property while you’re away. Be sure to account for all potential expenses of your rental property to make sure it’s still viable for you financially.
What is a good ROI for rental properties?
Unfortunately, there isn’t a steadfast answer for determining a solid ROI for a rental property. That being said, there are some general rules most real estate investors adhere to since certain ROIs may not be financially worth the effort. Specifically, you should aim for your yearly ROI to be 5% or more since this percentage means that you’ll earn a higher rate of return compared to other forms of investment.
Getting a 5% to 10% return for rental properties is pretty reasonable. That is, assuming you’ve included higher expenses for vacancies, repairs, and other costs. Of course, the higher the percentage, the better—just make sure to be thorough in your calculation.
If you feel confused or lost at any point when you’re determining potential ROI, it may be worthwhile to consult with a professional.
How to Get Approved for Financing a Rental Property
Compared to loans for primary residencies, second home mortgages can be a bit harder to acquire. However, there are steps you can take to increase your chances of getting approved for a rental property mortgage. Here are some things to consider:
- Strong credit score: When it comes to financing an investment property, having a strong credit score is very important for approval. A strong credit score and a good available balance lets a lender know you are less likely to default on the mortgage payment.
- Low debt-to-income ratio: This ratio compares an individual’s monthly gross income and their debt payment. Most lenders require a DTI below 45% before financing a vacation home.
- Higher Down Payment: The down payment for rental properties is usually between 20-30%. Lenders like to see these funds in an account for at least two months.
- Reserve funds: In addition to having funds available for the down payment, lenders like to see reserve funds before financing an investment property.
It’s important to note that financing options vary from lender to lender, so be sure to research what type of financing fits your needs, and then discuss your options with reputable lenders.
Location, Location, Location
When you’re looking for a profitable rental property, you should prioritize location. Pick a property that’s close to desirable amenities like restaurants, malls, hospitals, universities, entertainment, etc.
In addition, it can be helpful to find an area with a growing job market, expanding population, dropping crime rates, and access to public transportation. These areas will tend to have a large pool of potential renters so you won’t have to stress about finding tenants. Obviously, you don’t want to be stuck with a rental property that nobody wants to stay in.
Observe the vacancy rate in the neighborhood, as a high vacancy rate could signal a declining neighborhood.
Understand Your Legal Obligations
When you’re getting into rental property investing, it’s crucial that you understand the landlord-tenant laws in the area to avoid legal hassles. Make sure you are familiar with lease requirements, rent control regulations, eviction rules, and more.
About RCN Capital
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing as well as long-term rental financing for real estate investors, and that includes multifamily properties. RCN Capital also has flexible and competitive loan options available. If you are a real estate investor looking to secure financing for a rental property, RCN Capital is the lender that you are looking for. Connect with us today to discuss your next real estate investment.