Are you new to rental property investing? What\u2019s the easiest way to commit to an investment?<\/p>\n\n\n\n
For beginners, investing in rental properties<\/a> can be a huge financial decision. Many rewards come with the investment, but there are also some risks that you\u2019ll need to consider.<\/p>\n\n\n\n Below is a step-by-step guide on investing in rental properties for beginners who have little to no experience.<\/p>\n\n\n\n\n\n\n\n The first step of investing in rental properties for beginners is to pick a property. In The Book on Rental Property Investing<\/em><\/a>, Brandon Turner argues that when choosing where to invest in rental properties, it\u2019s important to consider neighborhood class.<\/strong><\/p>\n\n\n\n Higher-class neighborhoods have higher employment rates, income rates, and property values, along with good infrastructure\u2014factors attractive to tenants. Both price and demand are typically higher for properties in these neighborhoods, lowering cash flow because you have to keep rents competitive. If buying properties in the center of these neighborhoods is too costly, or rent streams don\u2019t promise to eventually cover costs, consider buying properties in the periphery, where prices often decrease. <\/p>\n\n\n\n Turner notes that lower-class properties can be easy to add value to through forced appreciation. However, if the area suffers from neglect, economic hardship, or crime, you may find it hard to find reliable and financially stable tenants\u2014many people aren\u2019t willing to accept these conditions for the long-term.<\/p>\n\n\n\n Aside from class, other locational features can appeal to would-be tenants, adding value to your investment. Strong educational options and nearby schools are key motivators for renting families, and most renters value good transportation and availability of common retailers. As a rule of thumb, Turner suggests you ask yourself if <\/strong>you\u2019d<\/em><\/strong> like to live where your rental property is located. Chances are your would-be tenant would react similarly.<\/strong><\/p>\n\n\n\n After deciding on a location, consider what type<\/em> of property you\u2019re interested in renting. Each has advantages and disadvantages: Turner suggests considering things like maintenance needs, financing options, and competition when choosing what\u2019s right for you.<\/strong><\/p>\n\n\n\n Single-family homes draw long-term tenants and are often more affordable than other property types (for instance, apartment buildings). Also, you\u2019ll control the whole property, meaning it\u2019s easier to manage the grounds and run appreciation projects. However, you may face more competition when buying these properties, primarily from homeowners. It can also be hard to build wealth<\/a> investing in these properties, as conventional lenders usually only allow you to finance limited properties at a time. <\/p>\n\n\n\n Turner explains that multi-family homes have multiple units, potentially offering more rent. You\u2019ll also face less homeowner competition when buying one. However, the more units involved, the more maintenance is typically required, and the higher the purchase price. Additionally, you\u2019ll face competition from other professional investors. <\/p>\n\n\n\n Condos and townhouses are both complex-based properties containing multiple units, often with different individuals owning different units. Turner notes that they both require low levels of maintenance and have low upkeep expenses. However, they\u2019re typically overseen by homeowner associations (HOAs) that significantly limit your control over the property and charge substantial fees. <\/p>\n\n\n\n Some investors opt for commercial rather than residential properties. Turner argues that commercial tenants tend to require less fuss than residential ones, with fewer late-night maintenance requests and more reliably punctual rent payments. That said, commercial properties tend to offer lower rates of return. Furthermore, initial costs are frequently higher. Finally, vacant yet specialized professional spaces can be hard to find the right tenant for, meaning longer periods without rent. <\/p>\n\n\n\n Turner notes that once you\u2019ve decided on a property type, you can use several methods to track down possible properties to invest in:<\/p>\n\n\n\n The Multiple Listing Service (MLS):<\/strong> a database with the most accurate survey of listings. In the MLS, smaller catalogs of regional listings combine to form a single national database. You likely need a real estate agent to access it\u2014another reason to cultivate this relationship early. <\/p>\n\n\n\n Direct Mail Marketing:<\/strong> frequently sending out postcards or letters to property owners you think might sell. Some owner lists are accessible for a fee, or you can make your own. This cold-calling approach appeals mostly to struggling owners who want to sell quickly and hassle-free.<\/p>\n\n\n\n Driving around, hunting properties:<\/strong> a low-cost option that\u2019s especially useful for finding options. Look out for signs of distress or neglect that often indicate no one resides in a property\u2014the owner might be poised to sell. <\/p>\n\n\n\n Evictions:<\/strong> Turner points out that landlords amid evicting tenants are often going through stressful and legally complicated experiences. They may be more apt to sell quickly\u2014and at a lower price\u2014if you present them with a timely exit opportunity. Eviction records are generally available to the public. <\/p>\n\n\n\n Craigslist:<\/strong> a common online hub for locating sellers or advertising yourself. Turner emphasizes that the site is free and easy to navigate.<\/p>\n\n\n\n The second step of investing in rental properties for beginners is financing your investment. Ideally, you\u2019ll want to make an all-cash offer to make your bid more competitive. Cash offers are attractive to sellers because they reduce the contingencies, which allow buyers to pull out of a deal without losing money within a window of time (the contingency period). Fewer contingencies mean greater odds that the deal will close smoothly and quickly.<\/p>\n\n\n\n Although <\/strong>Buy, Rehab, Rent, Refinance, Repeat<\/em><\/strong><\/a> by David Greene stresses the importance of all-cash offers, it doesn\u2019t have to be your cash<\/em>.<\/strong> Alternative sources of funding include:<\/p>\n\n\n\n If you choose not to pay for the rental property in full, you\u2019ll need to turn to finance agencies for loans. Investors typically have to put down 15-20% for a down payment if they choose this route.<\/p>\n\n\n\n Scott Pape (The Barefoot Investor<\/em><\/a>) suggests the following ways to save for a down payment<\/a>:<\/p>\n\n\n\n Finally, calculate how long it will take you to save for your chosen property if you funnel all of these savings and extra income into your down payment fund.<\/p>\n\n\n\n To get a loan though, you need to prove that you\u2019ll pay it back. One of the best ways to do this is to have a good credit score, showing you have a responsible history of paying back your loans.<\/p>\n\n\n\n Credit cards are a helpful way to build credit, which is the foundation of the rest of your financial life, says Ramit Sethi in I Will Teach You to Be Rich<\/em><\/a>. Your credit is a snapshot of your debt history, and it\u2019s what lenders use to determine whether to loan you money (like for a mortgage or a student loan). If you use your credit card regularly and pay the balance off in full, you\u2019re essentially taking out a mini loan and paying it back on time every month, which shows lenders that you can be trusted to borrow money and pay it back. <\/p>\n\n\n\n Once you\u2019ve found the property you want to buy and have a plan to finance it, you\u2019re to buy it. In this section, we\u2019ll explore the process of making an initial offer and the negotiating skills required, which makes the process of investing in rental properties for beginners easier.<\/p>\n\n\n\n According to The Book on Rental Property Investing<\/em><\/a>, there\u2019s no set rule for an opening offer, but you should ask two questions: First, how much competition is there for the property?<\/strong> When competition is strong, higher offers can put you ahead of the pack. Conversely, a buyer who\u2019s had a property on the market for a while without an offer might abandon her original asking price, making bidding low a sounder strategy. Second, ask why the owner is selling\u2014for money or expedience?<\/strong> This helps you better gauge a number they\u2019ll accept. <\/p>\n\n\n\n Turner highlights three post-offer scenarios: acceptance, counter-offer, or rejection. Counter-offers are extremely common, especially if you don\u2019t immediately meet the seller\u2019s asking price. They can also happen after a rejection if the seller changes their mind. <\/p>\n\n\n\n If the seller counter-offers, you may want to negotiate to reach a lower price that suits you both. Turner emphasizes that while negotiating, you must avoid appearing aggressive, confrontational, or insulting. You\u2019re likely to get a better price if the owner finds you professional, friendly, and approachable. Also, cite data to back up your offer\u2014things like local income and rent averages, vacancy rates, and employment rates. If it\u2019s clear that you know what a fair value for the property is, the seller is less likely to think they can take advantage of you. <\/p>\n\n\n\n As soon as you\u2019ve bought your property, Buy, Rehab, Rent, Refinance, Repeat<\/em><\/a> writes that it\u2019s time to start renting it and creating cash flow<\/a>. <\/p>\n\n\n\n Since you don\u2019t have much wiggle room in your rent prices<\/a> at this stage\u2014they\u2019re largely determined by the property you bought and the success of your rehab\u2014your priorities in this stage of investing in rental properties for beginners are to find good tenants, minimize vacancy, and manage your property effectively.<\/strong> <\/p>\n\n\n\n The tenants who will contribute most to your income are those who cause minimal property damage and stay for many years (and rent increases), saving you lost earnings during vacancies and the time and money required to advertise and fill vacancies. Increase your chances of finding a good tenant by screening interested candidates<\/a>.<\/p>\n\n\n\n While screening applicants, avoid violating Fair Housing Laws<\/a> by maintaining consistent screening requirements (ideally posting them with the advertisement for the rental) and steering clear of questions about the renter\u2019s age, sex, race, religion, disability, native language, or familial status. <\/p>\n\n\n\n Greene states that you can minimize vacancy by strategically setting your rent prices and lease periods and by keeping tenants happy.<\/strong> <\/p>\n\n\n\n Greene recommends you set rent prices at the lower end of your estimate initially to attract tenants<\/strong> and fill vacancies quickly. Then raise rents to the higher end of that range during lease renewals\u2014at that point, most tenants are willing to pay more to avoid moving. <\/p>\n\n\n\n Additionally, set your lease periods to expire during the spring or summer<\/strong>, when most renters are looking for homes. If your tenants move out, you\u2019ll have more interest from prospective tenants and reduce the \u201cturn time,\u201d which is how long the unit sits vacant between renters. <\/p>\n\n\n\n Finally, don\u2019t give your tenants a reason to leave<\/strong>: Be accessible, responsive, and prompt with maintenance requests.<\/p>\n\n\n\n Greene also suggests rewarding tenants (those who pay on time, maintain landscaping, and keep the property in good condition) by discounting their rent raises during lease renewals. Although you lose some money in the lost rent, these tenants save you money in maintenance costs and city code violations. <\/p>\n\n\n\n When it comes to managing your property<\/strong>\u2014from responding to maintenance requests to handling lease renewals and evictions\u2014you can do it yourself or hire a property manager <\/strong>(PM).<\/p>\n\n\n\n Greene lists the pros and cons of each option:<\/p>\n\n\n\n Greene writes that this choice depends in part on your personality: Some investors may enjoy the work or value the control more than others. However, as you build your portfolio of investment properties, managing them yourself becomes less feasible,<\/strong> and you may reach a tipping point<\/a> where you have no choice but to hire a PM. <\/p>\n\n\n\nStep 1: Choose a Property<\/strong><\/h2>\n\n\n\n
Property Types<\/strong><\/h3>\n\n\n\n
Locate Possible Properties<\/strong><\/h3>\n\n\n\n
Step 2: Receive Financing<\/strong><\/h2>\n\n\n\n
Build Your Credit<\/strong><\/h3>\n\n\n\n
When lenders look at your credit, they\u2019re looking at two main components: your credit report and your credit score. Your credit report <\/strong>is a comprehensive account of your credit history\u2014all the loans and credit cards you\u2019ve ever had, and all the payments you made on them. Your credit score<\/strong> sums up all that information into a single number between 300 and 850\u2014the higher the number, the better your credit and the more attractive you are to lenders.<\/p>\n\n\n\nStep 3: Negotiate a Property<\/strong><\/h2>\n\n\n\n
The Introductory Offer<\/strong><\/h3>\n\n\n\n
The Art of Negotiating<\/strong><\/h3>\n\n\n\n
Step 4: Manage the Property<\/strong><\/h2>\n\n\n\n
Screen Your Tenants<\/strong><\/h3>\n\n\n\n
Minimize Vacancy<\/strong><\/h3>\n\n\n\n
Hiring a Property Manager vs. Self-Management<\/strong><\/h3>\n\n\n\n
<\/td> Property Manager<\/strong><\/td> Self-Management<\/strong><\/td><\/tr> Pros<\/strong><\/td> Experience and skill set Familiarity with the area <\/td> No cost, control over every aspect of management<\/td><\/tr> Cons<\/strong><\/td> Higher cost Time and effort to find a high-quality, compatible PM<\/td> Lack of skills and experience, consistent time and effort (that could be better spent finding, buying, and rehabbing new properties)<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Wrapping Up<\/strong><\/h2>\n\n\n\n