8 Things You Need to Know Before You Invest in Rental Properties

June 16, 2022

 

Real estate investing as a concept may sound simple enough, but the reality is that it isn't just sitting around while other people pay you money.

Don’t fall into the trap of thinking that real estate is a passive investment. You are, in fact, a small business owner responsible for advertising, marketing, customer relations, maintenance, accounting, tax, bookkeeping, insurance, finance, banking, accounts receivable/payable, and the like.

Investing in rental properties involves actually running a business, and it’s not always about just the numbers.

Numbers don’t tell the whole story. Look beyond the numbers and thoroughly research the property itself and what it needs, the neighborhood the property is a part of, and the city that you’re investing your money into.

Before you get overwhelmed by sorting out tenant profiles, the risk involved, and the local economy that you are buying into, here are ten things you need to know before you get involved in rental property investing.

 

1.) You May Not Be Able to Live Off the Cash Flow

If you are able to pull a $500 monthly cash flow out of a rental property, not only is that probably more realistic than assuming it will be in the multi-thousands, but you also won't be able to live off of that and quit your job.

In fact, your cash flow generally gets recycled back into the property in order for you to maintain it on a long-term level, which is the name of the game because time is what is going to allow you to pay down the mortgage, so the asset can appreciate.

2.) Buy Property in a Place with a Future

Before you invest in rental properties, make sure that you thoroughly understand the economic fundamentals of the cities in which they were built.

Buy in cities with strong economies, job growth, expanding populations, and low rates of vacancy.

3.) Be Smart About Your Purchase

If a rental property is really cheap, there is probably a reason for that, and it isn't because you got lucky.

If you can't figure out why the price is that low, then don't buy it at all because there must be some hidden drawbacks or reasons why the seller wants to get rid of it at a reduced price.

The lower price could be due to a location surrounded by vacancies or a problematic tenant that you could, unfortunately, be inheriting.

Do your due diligence research before you commit to purchase because once you sign off on it and the money changes hands, it is too late to change your mind.

4.) Understand the Market

The market is constantly fluctuating, but you can generally have some level of confidence that it will remain solid over the long haul.

If your property has a respectable amount of cash flow, low vacancy, and agreeable tenants, you will have the best chances to ride the ups and downs and remain stable in the market instead of being forced to sell off your rental property.

5.) Buy Near Public Transit

Having your rental property sitting within walking distance from public transit options is definitely a desirable feature in an investment property because tenants may not own vehicles and will pay a premium to be close to a dedicated transit station.

This could mean that you can aim for a 15-to-20 percent greater lift in rents or property values than the rest of the market to insult your investment during a downturn.

6.) Understand Tenant Profiles

Arguably the biggest risk that you are taking in the rental property business is the actual tenant that you are renting your property to.

Positive tenant profiles consist of those that pay their rent on time and treat the property with respect.

Figure out your tenant profile with their age, education level, household size, place of employment, and activities that they regularly engage in, and then construct your investment business model around them.

7.) Know What to Ask Your Investor Realtor

Once you are at the point where you are ready to start interviewing an investor realtor, be ready to ask them specific questions such as:

Have you followed through with at least 50 properties of this nature during the course of your career?

What are the development opportunities for this property and the best investment business models for this neighborhood?

How many properties have you personally invested in?

What does the tenant profile look like for this location?

8.) Make Money on the Buy

When experienced property investors say that they make money on the buy, that doesn't refer to spending all day every day on the hunt to find the most lucrative deal or by finding that affordable fixer-upper that they can transform from a shack to a palace, only to never take any action.

Making money on the buy means that you actually have to turn your knowledge and all of that searching into an actual purchase in order to build wealth, holding onto the real estate in your portfolio for as long as you can.

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