Rental Property Process | Benefits of Rental Properties
Purchasing a rental property is a significant decision; it provides endless opportunities for financial freedom and creates generational wealth if approached correctly. However, there are as many risks associated with owning rental properties as benefits. Considering the financial implications, you will want to come to owning rental properties with prior knowledge, experience, or proper guidance. The theory of owning rentals is simple; You purchase a house, the individuals renting from you end up paying off your second mortgage, and you’ll have supplemental income from your tenants’ rent payments to generate passive revenue. This blog post discusses the methods to acquire and purchase a rental property, the best rental investments, maintain the property, and our personal experience and recommendations.
Benefits of Owning Rental Property
Rental properties can be financially rewarding and have numerous tax benefits. While generating passive income on your rental property, you’ll also have the opportunity to deduct many expenses connected with the rental property, such as necessary expenses, home improvements, insurance, interest on the mortgage, and maintenance costs. Many investors aren’t aware of the benefits of seasonal rentals; if you rent the property seasonally, you can live in the property for fourteen days yearly and still deduct the property expenses. A similar concept will be renting extra space in your property, such as a spare bedroom or the basement, and being able to write off a percentage of the mortgage interest. Owning rental property is an excellent way to diversify your investment profile with low risk and high return on investment.
- Rental properties have tax benefits that a residential property does not qualify for. As a landlord, you can deduct expenses associated with the property, like insurance, maintenance, and repair costs, while generating income from this home.
- Seasonal rentals – if you own a property that you rent seasonally, you can reside there for days yearly and deduct the expenses. “Essentially creating a cost-efficient vacation for your family!”
Ways to Acquire Rental Property
There are many different methods to acquire real estate. One of the most utilized routes will be to hire a real estate agent. The real estate agent’s duties entail locating a property that will provide the highest return on investment in the most desirable area that will continue to grow in value. Another option will be to work with a property manager to give you input on which properties may be most appealing to potential renters. When comparing the two methods, it’s essential to remember that a licensed realtor can assist you with negotiating the purchase price when buying a home. At the same time, a property manager can give you a general idea of rental rates in the area and what repairs will be necessary before placing the property on the rental market.
- Best way to obtain a rental property is by utilizing a licensed real estate agent; the realtor’s task will be to locate a potential investment property with the highest return on investment. You will also be able to work with a property manager that can give you input on what property characteristics are desired by renters.
Importance of Location: Location is Key
Location is vital when it comes to purchasing property! When buying rental properties, you will want a densely populated and desirable area close to parks, schools, hospitals, public transportation, shopping, and amenities. A preferable area will be considered a neighborhood with rising rent prices and declining vacancy rates. It’s essential to view the recent market trends in the area. You want places projected to increase in population soon. You want to find a market that people are moving into rather than one in which people move out. An increase in people will ultimately drive continued demand for rental housing. If a property is expensive or in a high-priced area doesn’t mean it will be a profitable investment. Property tax is a factor to contemplate since it’s part of the yearly expense affecting your net income. Consider all factors when researching possible rental property locations! Lastly, choosing an area within a short distance of your residents is crucial to keep the home in proper condition and control the process running smoothly!
- When purchasing a rental property, different neighborhood indicators can ensure a sound long-term investment. Things to look out for involve an area close to public parks, qualified schools, reputable hospitals, assessable public transportation, stores, and other desired amenities.
- Some investors look for signs of developmental and population growth; an increase in population directly results in higher rental rates. Finally, property tax is an aspect to consider when determining the property’s annual return on investment.
How to Purchase a Rental Property
The utmost desired method to purchase property is by cash; you can avoid the monthly mortgage payments and interest rates. Unfortunately, most investors aren’t fortunate enough to have the funds on hand, so the only choice will be to explore financing options & take on a loan/mortgage. One of the most important things you can do is get a mortgage pre-approval, so you’ll know how much a bank is willing to lend you. Next, you submit information about your assets, debt, and credit history. The next step will be to contact an agent or another knowledgeable professional to search for potential rental properties. Once the decisions are made on the rental property, you will want to submit a down payment of 20-25% of the total property price to lower the interest rates. Unless you’re utilizing a first-time homeowner loan, at that point, you’ll be required to submit a down payment of 5-10% of the total sales price. “You’ll also need a credit score of at least 640 and a debt-to-income (DTI) ratio of no more than 45 percent, according to Fannie Mae.” The process of purchasing property is simple when provided with the proper guidance!
- The first step in purchasing a rental property will be to explore loan/mortgage options; pre-approval will allow the individual to know exactly what they qualify for and where they stand.
- Next step will be to contact a realtor or other real estate professional to begin searching for properties. Having at least twenty percent for the down payment is essentialto keep the interest rates reasonable.
How to Properly Screen Tenants
It’s paramount to screen potential tenants properly. When choosing the individuals to live in your rental property, you want to make the right decision, or it may cost you time, resources, and money. You want to choose the right tenants in a manner that’s fair and done correctly. The process to screen tenants shall be done similarly to the process lenders complete to qualify individuals for mortgages, and the screening process is risk assessment. You will set specific tenant criteria to avoid obstacles such as late or missed rent payments. Some standards will require a minimum credit score of roughly 630-640, a credit history over two years, proof of stable employment, no excessive debt, and the ability to pay the first month’s rent and the security deposit. Most landlords will require the first and last month’s rent and a security deposit if the individual has a low credit score; at times, the landlord will even require a co-signer for the tenant.
A few potential “red flags” should be considered when screening tenants: unstable employment history, evictions, late or missing payments, and bankruptcies. Remember that some individuals change and mature over time; just because this potential tenant made mistakes in their past doesn’t mean they deserve to be overlooked without consideration. Lastly, review the “fair housing act” and understand that it’s illegal to discriminate against renters based on their race, sex, religion, disability, or national origin; as a landlord, you may not refuse to rent to anyone within those protected categories. Also, a landlord cannot lie about the property available, terms, or conditions. These aren’t just unethical behaviors; they are also illegal actions!
- Properly screen tenants to save yourself time and money. Conduct the screening process similar to a lender or bank to minimize risk. Standard requirements consist of a minimum credit score of 630, credit history expanding over two years, proof of employment, the debt amount, and the ability to pay a security deposit along with the first and last month’s rent.
- Potential red flags – unstable employment history, prior evictions, and bankruptcies. Remember that individuals mature and change over time, so it’s essential to consider the time factor. That way, you do not overlook a qualified tenant based on their simple mistakes years ago.
How to Maintain a Rental Property
As a landlord, you want to properly maintain your rental property to satisfy your tenant, avoid fines, and minimize issues from arising in the future. Many landlords hire a property manager to handle any repairs or issues, this takes a lot of pressure off of landlords, but as with anything else, it comes with a fee. Most property managers request a percentage to overlook the property and the tenants. The property manager will hire skilled tradespeople to complete renovations and repairs, including plumbing or electrical problems. Property managers will also be responsible for renting the house while collecting rent from the tenants. Although there are tax benefits involving the home maintenance of rental properties, any updates or renovations done to a rental property can be deducted as a tax write-off. Essentially, you’re getting a tax break for raising the value of your rental.
- It’s always critical to maintain your properties to prevent a minor issue from becoming a costly problem. If it’s a rental property, keeping the house safe to avoid fines and ensure the safety of your tenants and their guests are essential. Suppose you own a rental property but do not have the time or resources to overlook every aspect of owning this property. In that case, it’s suggested to hire a property manager to oversee the rental process and ensure proper home maintenance.
It’s suggested that first-time landlords purchase turn-key rental properties to start renting. Turn-key means a property requiring little to no repairs to put a tenant in place, and these properties help reduce the risk for first-time homeowners. In addition, turn-key properties generate passive income with immediate cash flow. When a turn-key property is purchased, the majority of the time, a qualified tenant already resides in the property with a lease agreement. Even experienced investors prefer to turn-key property because it’s simple and requires little attention to be an acceptable form of passive income. If you can purchase a turn-key property, it will likely not need a property manager. The only task as a landlord will be to locate a proper tenant, collect rent, and handle any obstacle.
- First-time landlords purchase property in turn-key condition to minimize the risk and to start generating income as soon as possible.
Different Types of Rental Property
The average real estate home investor is offered a few different rental options for investment properties; Single-family houses, Multi-family houses, & Condo units. Single-family homes are the most popular and standard method for investors. These single-family homes offer lower cash returns than unit properties available to multiple tenants. Multi-family properties will require more attention but provide an adequate return on investment. The most profitable rental investment will be to own commercial property, but that opportunity isn’t present for a regular or new investor. Once you acquire your first rental property, we recommend reinvesting the profits into more rentals. Rental properties are one of the best routes to generate passive income, and it’s an investment that continuously increases in value while offering multiple tax benefits.
The concept of house hacking will be an excellent way to gain experience with being a landlord with no risk. The real estate investing strategy of house hacking refers to purchasing a property, usually a multi-unit home, and then renting out a portion of the property. It’s a great way to lower mortgage payments and sometimes provides a way to live rent-free. An example of house hacking will be purchasing a single-family property and then remodeling the basement into a small apartment or efficiency. After the renovations, you will rent that part of the property to a potential tenant.
Another much more feasible example is to purchase a duplex or triplex, living in one of the units while renting out the other. Rental income generated is used to pay down the mortgage balance & build equality in the property, allowing the homeowner to do a cash-out refinance and use these funds to purchase another rental property. These many benefits involve house hacking; it permits a landlord’s experience but allows individuals to minimize the number of funds and capital in the rental property! Like any other method of investing in rental properties, choosing the right tenant is imperative to make the process as manageable and effortless as possible.
- House Hacking – Reside in a multi-unit property while renting out a portion of this house. It helps lower mortgage payments and sometimes provides a route for an individual to live rent-free.
Return On Investment
Return on investment, also known as (ROI), is a way to understand your property’s value fully. The ROI is how much money you make divided by how much you spend on the property. The first step in calculating your return on investment will be to estimate the annual rental income. To determine the yearly payment, you will research the rental rates of similar properties in the subject area. Next, you will want to choose the annual expenses, including insurance, maintenance costs, taxes, necessary repairs, mortgage payments & interest, and any other associated fees. Next, select the net operating income by subtracting the annual rental income from the annual expenses. Following this step, you will want to calculate the total cash investment. You will determine this by adding the down payment, closing, and repair costs; divide the NOI (net operating income) by your total cash investment to establish your return on investment.
- “ROI – financial ratio used to calculate the benefit an investor will receive concerning their investment cost!”
Budget For Unexpected Expenses
When owning a home, you’re faced with many obstacles that may appear out of nowhere; we live life on life’s terms which means we always have to prepare for the worst. Any issue can arise within a property from a leaky problematic roof, faulty electrical, plumbing issues, etc. When these problems occur in a rental property, it’s crucial to solve them as soon as possible. It’s suggested that landlords save roughly twenty to thirty percent of their rental income for maintenance, upkeep, and emergencies. These repairs are tax-deductible, but you want to ensure that the money is on hand to fix any issue.
Bottom Line: Conclusion
It may seem as if being a landlord can be a lot of work and overwhelming, but at the same time, it can be rewarding. Owning a rental property can be a sound investment if the rental income offers another revenue stream. It’s crucial to weigh all aspects and consider the pros and cons; the risk factor may vary depending on the investment. Being a landlord isn’t for everyone; success takes certain character traits and patience. If you’re considering investing in rental properties and real estate, it’s best to consult a professional such as a real estate agent or property manager, for proper guidance.
Rental properties are a superb method of generating passive income, resulting in financial freedom and generational wealth. Buying Property 215 wants to witness others succeed within the real estate industry; we offer guidance within our mentorship program; with years of experience while setting our standards high, we’re a leader in the Philadelphia real estate market. Just Google “we buy houses” and our small business appears as one of the top companies! The Better Business Bureau accredits our small business with an A+ rating and 5-star google reviews!
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