Should i get into rental properties

If an investor can obtain attractive financing to secure a rental property that produces positive cash-flow in an appreciating market — and if the investor is willing to take on the responsibility of managing the property or working with a property management company — then rental property investing can be a viable real estate investment strategy.

Of course, just as with any investment, it is important to understand that rental property investing carries the risk of loss and there are no guarantees of a return. To determine whether a rental property investment can work for you, you first need to come up with an informed estimate of the return on investment ROI that the property is likely to generate.

For many types of investments, you can determine the ROI by calculating a simple formula: gains minus cost, divided by the cost. In reality, the ROI calculation will be more complicated than this, because you will need to factor in expenses such as capital-gains taxes on your stock sale and any broker fees you incurred while buying and selling your shares.

But things get more complicated still when you are attempting to determine the ROI potential in advance of investing in a rental property — because there are so many variables that can affect both the income potential and the expenses of the property. Determining the possible ROI of an income-producing property will require you to make estimates based on whatever historical data is available on market rental rates, vacancy rates of similar properties in the area, ongoing expenses for maintaining and operating the property, and other variables that might change at any time.

And bear in mind, as stated previously, rental property investments carry risk of loss just as any other type of investment, and returns can never be guaranteed. But assuming you have narrowed your search for rental investments to a given area or even to a few specific properties, you should then run some basic calculations to get a better sense of how well those properties might be able to generate income for you.

Your goal, of course, will most likely be to find a rental property that generates positive cash-flow — where the rents and any other income you earn on the property is greater than all expenses, including your mortgage payment, property management fee, property taxes calculated monthly , repairs, insurance, etc. However, these calculations are always more complicated and require accounting for more variables.

Keep in mind that this is purely a simplified example and potential opportunities can vary from the example provided. One of the most challenging aspects of buying rental properties is compiling a complete list of all expenses. Failure to take into account even one upfront capital outlay or ongoing expense can lead you to an inaccurate estimate of the cost and income potential of your property.

It is extremely difficult if not impossible to know in advance all of the expenses your rental property may require. You also may need to have reserves in place, and the home may need some repairs. Is it legal to buy a rental as an owner occupant? Well, if you never live in the home, no, but you can buy a house as an owner occupant then turn the property into a rental after one year.

When you buy as an owner-occupant, you can get loans with much smaller down payments. You can even use down payment assistance programs to lower the down payments even more! There are even loans like the FHA k that allow you to finance repairs. With many of these loans, you will have mortgage insurance, which adds to the monthly costs. Another option to lower the amount needed to buy a rental property is to refinance the loan after you have owned the property for a little while.

If you get a great deal on a rental, you should be able to refinance it soon after you buy it and take some, all, or even more cash out than you have invested in the property. You can usually refinance a property for 75 percent of the value. If I would have refinanced my first rental a year after buying it, I could have pulled out most of the money I had used to buy it. That new loan is more than what I bought the property for plus any repairs I made.

House hacking is when you combine buying as an owner occupant with renting out a house. You can buy a property that has multiple units or rent out part of a house you live in to help pay the mortgage.

You can buy a property that can be rented out right away with a low-money-down loan! There are many ways to buy rentals with less money than the traditional 20 to 25 percent down. Do not let that aspect of real estate deter you! I talked about my first rental already, but I bought more rentals in the next few years. I was not able to buy 10 rentals all at once, but I did buy:.

It took time to save the money to buy rentals as I was putting 20 or 25 percent down on all of them. I could have bought many more much faster if I knew what I know now, but things still worked out great. I got awesome deals on all of them.

We know we can make money with rentals, and that it may not take as much money as you think, but what type of property should you buy? I do not think there is one best strategy for everyone. A lot depends on the investor, their market, and their goals. I started buying rentals with single-family homes. A lot of people say they are not a great investment, but they have been an amazing investment for me.

When I started to buy rentals in , I could make just as much or more money on single-family homes than I could on multifamily properties in Colorado. Now, every market is different, and the exact opposite can be said in other markets.

A lot of investors love multifamily homes, but they are not my favorite. With multifamily, the landlord pays more expenses like some utilities, yard maintenance, parking lot maintenance, etc.

There is also usually more turnover, and in my experience, the tenants can be harder to work with. With multifamily, the expenses to maintain could be slightly lower because you have more units under one roof. However, I usually see multifamily investors needing to rehab their units much more often than I have to rehab my single-family homes. I am not saying multifamily is bad, but in my market, I am really glad I went with single-family.

I stopped buying residential rentals in because prices became so high that I could no longer cash flow with single-family homes. That is one disadvantage to single-family homes.

The higher the prices are, the harder it is to cash flow on the properties. I was going to buy rentals out of state when I discovered commercial real estate in my area.

I was able to buy 7 rentals in the last couple of years that cash flowed better than my single-family homes. Commercial real estate can be very complicated, and it takes a lot of time to learn how it all works. There is an opportunity to make a lot of money, but you can lose a lot of money as well. Many people are able to make more money renting properties out more like hotels than actual houses. The rates are higher, but it takes much more management, and you have to be careful with cities changing zoning laws and many areas outlawing AIRBNB.

Single-family homes or even small multifamily properties that you can house hack are a great way to start. As you get comfortable and learn the business, you can move into bigger things with apartment buildings or commercial, or just keep buying single-family homes. There is no best strategy, and it often depends on what the best properties are in your market. A lot of people think landlords are constantly unclogging toilets in the middle of the night.

The truth is I have never unclogged a toilet in one of my rentals. I have never done any manual labor in one of my rentals. I have always had contractors, plumbers, or other professionals do that work. I did manage my rentals until I had seven to be honest, my wife managed them, but I liked to take credit. It was not difficult to manage the properties, but it did take time. After I had seven rentals, we realized that I was better off using my time to do other things besides finding tenants, collect rent, and oversee the properties.

When I hired a property manager , it was awesome. I had someone to take all the calls, rent the properties, and unclog those toilets…or at least call someone else and tell them to unclog the toilet.

I have not been some of my rentals for years! You do not have to manage the properties yourself, and for many people, you should not manage them yourself. You need to be tough and strict with tenants to make sure they are paying rent and to make sure you are not buying into sob stories. I was not tough when I managed my rentals, and I think I made more money with a property manager because they were tough and collected more money and as chose better tenants.

If you decide to manage the properties on your own, make sure you know what you are doing. Advertise the rentals well, know what the right rent to charge is, take your time screening tenants, verify references, and be strict with late fees and inspecting the property on a regular basis.

A lot of people get burned out with rentals because they manage them themselves. A good rental should make money even with property management costs. My best-selling book Build a Rental Property Empire goes over everything in this guide and much much more! You can get it at Amazon as a paperback, ebook, and audiobook! I fixed up a house completely on my own in It was the worst mistake I ever made! It helped teach me that my time is better-used managing, planning, and looking at the big picture, not fixing things up.

If you are a contractor, maybe it makes sense to fix up the properties yourself. It takes some time and experience to find good contractors and people to work in your houses, but you do not have to do it yourself.

Hire those repairs out, and if you buy the right properties, you should be able to afford it and have less on your plate. The other complaint I hear a lot is that a market is too expensive for rentals, and unfortunately, that can be true.

The tough thing about rentals is they do not work well in every market. The higher home prices are, the tougher it is to make money with rental properties. You can still do it, but it takes work. You may have to look at investing out of state or in different asset classes like I do with commercial real estate. Investing in rentals can have its downsides as well. I have had tenants leave without notice and I have had to evict tenants.

If you own enough rentals for a long enough time you will run into these problems as well! It is very important to have reserves when you buy rentals. That means you have money set aside to cover expenses if a tenant moves out. You also need some money set aside in case a rental needs some repairs before you can rent it again. The more rentals you have the less one vacancy or bad tenant will hurt you because you will still have money coming in from other properties.

A lot of people think that every real estate investor went bankrupt in the housing crash. That is not true, in fact, many investors did just fine. There's always the potential for an emergency to crop up—roof damage from a hurricane, for instance, or burst pipes that destroy a kitchen floor.

It's tempting to look for the house that you can get at a bargain and flip into a rental property. However, if this is your first property, that's probably a bad idea. Unless you have a contractor who does quality work on the cheap—or you're skilled at large-scale home improvements—you likely would pay too much to renovate.

Instead, look for a home that is priced below the market and needs only minor repairs. For every dollar that you invest, what is your return on that dollar? Stocks may offer a 7. The more expensive the home, the greater your ongoing expenses will be.

In addition, experts advise never to buy the nicest house for sale on the block—and ditto for the worst house on the block.

Condos can be a good option for rental property buyers because they tend to be more affordable than comparable single-family homes, and they are often located in desirable locations think: at the beach or a ski resort. Additionally, condos often have fewer maintenance demands since owners aren't responsible for taking care of the grounds or the building's exterior. Still, financing a condo can be trickie r than getting a mortgage for a single-family home.

It's also important to consider potential special assessments. You may be able to swing the monthly dues with no problems, but if the building needs, say, a new roof, you may owe a special one-time payment that could be thousands or tens of thousands of dollars. Rental owners need to be familiar with the landlord-tenant laws in their state and locale. It's important to understand, for example, your tenants' rights and your obligations regarding security deposits, lease requirements, eviction rules, fair housing, and more in order to avoid legal hassles.

Rental property owners can manage the property themselves or hire a property manager. Still, hiring an experienced property manager can be well worth the cost. After all, it means less work and fewer headaches for you, while taking advantage of their industry expertise. In general, a property manager will:. To decide if hiring a property manager makes financial sense for you, ask yourself these questions:.

In every financial decision, you must determine if the payoff is worth the potential risks involved. Does investing in real estate make sense for you? Because your income is passive, notwithstanding the initial investment and upkeep costs, you can earn money while putting most of your time and energy into your regular job.

Unlike investing in stocks or other financial products that you cannot see or touch, real estate is a tangible physical asset. Although rental income is passive , tenants can be a pain to deal with unless you use a property management company.

If you would like to invest in a rental property but don't have the money or expertise to make it happen, you might want to consider a real estate partnership. In simple terms, an investing partner helps finance the deal in exchange for a share of the profits. Keep in mind that a partnership isn't an "easy button," and it doesn't get you out of any work. You still have to do your homework, practice your pitch, and be ready to show prospective partners that the investment makes financial sense.

You don't need a Wall Street connection to find a real estate investor to partner with. Instead, you can ask your own network of family and friends, find a local real estate investment club, consider real estate crowdfunding , or search for social media groups that target real estate investors. Lenders typically have stricter guidelines when it comes to rental properties. That's because rental property mortgages have a higher rate of default, since borrowers in financial trouble tend to focus on their primary home's mortgage first.

Condos are often cheaper than comparable single-family homes, and they have fewer maintenance requirements. However, it can be more difficult to finance a condo, and you must consider the ongoing association dues and the potential for expensive special assessments. When considering a condo for an investment, be sure to investigate the financial health of the homeowners' association and the current condition of the overall building—not just the individual unit.

Be realistic in your expectations. As with any investment, rental property isn't going to produce a large monthly paycheck right away, and picking the wrong property could be a catastrophic mistake.

Still, rental properties can be a lucrative way to invest in real estate. For your first rental property, consider working with an experienced partner. Or, rent out your own home for a period to test your proclivity for being a landlord. Accessed Nov. Most lenders require a down payment of at least 15 percent for an investment property. That old realtor mantra about the importance of location takes an interesting turn when applied to income property. Investors can earn a return in two ways: cash flow and appreciation.

In some areas investors may want higher cash flow in order to compensate them for slower appreciation. But if investors expect an area to appreciate substantially, they may be willing to forgo some of the cash flow in order to enjoy that appreciation. The result: house appreciation outstrips the growth in rents, and houses appreciate while yielding relatively low cash flow.

His solution: Err on the side of appreciation. The unit Kisner has held for 13 years has had two tenants and low maintenance, while the other has had three tenants in four years — the last one a costly eviction.

Then, you hopefully also see some appreciation. As you pay down or eliminate principal over the years, you should be able to grow your cash flow. If you purchase a rental property, should you be your own landlord or fork over percent of your rental income to a management service? On top of this issue, are you comfortable making the executive decisions that must be made in managing a property? Will you repair or end up replacing that failing air conditioner or leaky dishwasher?

Depending on the state, county and city where the property is located, landlords can give notice of eviction for a specified period. The landlord also might offer a new lease contract at the same time. While some landlords are skeptical of the paperwork and potential upkeep problems presented by some Section 8 renters, Hertzog views Section 8 tenants favorably.

They take excellent care of the property because this is their home. This is where they want to be. One downside to Section 8 renters is that it may be more difficult to increase rents over time, which could impact your ability to offset rising costs with higher rental income.

State and local landlord-tenant laws can act like an open manhole cover for rental owners who ignore them, according to Hertzog. Case in point is tenant security deposits. Of course, this is only one aspect of the laws surrounding rental property, and there are many others that landlords must know in order to avoid running afoul of them.

Rental property can be an excellent investment if you approach it in a business-like way.