Over the weekend I had a call with a family who is interested in buying…
There are many ways in which a person can make a living when it comes to real estate investing some of them carry more risks than others. It goes without saying that those that carry the greatest risks are often the very real estate investment methods with the highest potential profit but slow and steady, in many cases, wins the race. Flipping houses is in the news a lot because so many fortunes have been made doing this—more than a few have been lost in this venture as well but those don’t make the news nearly as often. What about rental properties?
Working with rental properties isn’t nearly as glamorous and doesn’t provide the almost instant profits that flipping houses might but it is also a great and very valid method of real estate investing that will build a steady profit over time if you plan properly. Rental properties are in demand now more than ever with so many people going into foreclosure and losing the homes they’ve worked hard to build for their families. For this reason rental properties are a good thing to own at the moment, especially those that are family homes.
There are many reasons that people rent and while there are some risks involved when renting properties, the risks are much lower than the risks involved in flipping or development endeavors. There are a few things you should consider when purchasing a property for the sake of renting however in order to make a wise and long lasting decision for your real estate investment.
First, only invest in rental properties in areas that people want to live in. It may be true that you can buy property cheap in a few very run down sections of town but it is doubtful that you will turn those properties into profitable rental units. It is best to pay a little more for a more attractive address for renters. You will find that your properties are inhabited more often, which will make you more money in the long run. We look for areas with a high percentage of owner occupied houses which translates into well maintained houses and better neighborhood.
Second, know your customers. Pay attention to the types of people in the area and buy rentals accordingly. You may be interested in 3 bedrooms 2 baths home that would be ideal for a small family. You do not want this property however in an area that is geared towards young college students or with active nightlife. Find properties that matches the tenants you are attempting to attract.
Third, don’t be greedy. The goal of owning rental properties is, of course, to make money. At the same time if your rent is too high you will find that your property will sit empty more often than not. Every month that your property is empty is a month that you aren’t making money on that property at best and a month that you are losing money at worst. Assume reasonable rental rates when evaluating a property for rentals.
Fourth, understand the economy. This is especially important if your rental properties are out of town. Study the local economy: largest employers, unemployment rate, population growth. Read newsfeed to learn about additional investments, new hires made in your local market. This will help with many things, not the least of which is determining the demand for your property and how much to rent the units. We look for areas with good job prospects, business investments, large companies in a growing area of the overall economy. Here are some infographics summarizing some of the markets we invest in.
Finally, when renting properties you need to keep your eye on the long-term goals rather than shortsighted goals. Property rental is a marathon rather than a sprint with the greatest profits coming at the end. You will want to pay as little interest on the property as possible and pay the property off as quickly as possible in order to realize the maximum profit potential and acquire new properties. The real money when renting properties as a real estate investment isn’t in renting out one or two units but twenty or thirty. The more rental properties you own the more money you stand to make from owning them.