Beginner's Guide for Investing in Rental Properties

Beginner's Guide for Investing in Rental Properties

Rental property investment is a good option to build wealth, provided you know certain basics rules of investing. In this WealthHow article, we give you a few tips to help you get started.
WealthHow Staff
As stock market investment is very risky in the present recession scenario, many people are opting for investing in rental property. Though the annual return of real estate investments is comparatively lower than stock markets, it is considered a stable and decent investment option. If you are a first time real estate investor, then you need to be very careful, otherwise you may land into financial problems. As a beginner in real estate investment, you are required to research on the basic rules of investment. You can talk to property owners and investment advisors to know the pros and cons of real estate investment.
Understanding Cash Flow
The first and foremost step is to understand the concept of cash flow. In simple terms, cash flow is calculated by subtracting the housing expenses (mortgage payment and property tax) from the money that is received from the tenants per month. Positive cash flow is when the received money is more than the housing expenses; whereas, if the expenses are higher than the generated income from the property, it is called a negative cash flow.
Rules and Regulations
Before you start any investment, read the rules and regulations of investing in rental properties. There are certain liabilities and responsibilities of real estate investments, which are specified in the country's jurisdiction. To know more about real estate investment tips, property deals, rules and regulations, you can join the 'landlord network' of your area. This will help you in knowing which properties are on sale, and the ones worth buying.
Choosing Rental Property
This is the most crucial part of investing in rental property. You can opt for a single or multi-family unit or a vacation home. While searching for properties, make sure you consider locations which are in demand, so that you can find tenants easily. Such locations include areas near colleges, universities, corporate offices, and good residential sites. This way, you will benefit in both ways, getting tenants and high rent charges. A property in a suitable location is also easy to sell, without incurring losses. Hence, take quality time and check for the future income potential before finalizing the properties.
Property Buying Tips
Even if you get a good property deal in a good location, do not forget to evaluate the property. You can consult a professional or a real estate agent to calculate the value. It is better to discuss with landlords of the area where you are planning to purchase the property. To get a better idea about rental property tax, you can seek advice from a tax advisor or a tax professional. Always discuss with a lawyer to avoid any legal issues of rental property investments. While purchasing a rental property, make sure you buy a renter's insurance.
Choosing Tenants
After you purchase a rental property, you can start advertising, in order to find tenants as soon as possible. However, do not make haste, and also choose the tenants carefully. Make sure you analyze the creditability of the tenants for your property. Before proceeding with the formalities of renting, you can run credit checks and screen tenants, so as to minimize future problems. You should discuss the mode of transaction and also gain vital information like their background, references and permanent address. It is always advisable to collect security money from the tenants to avoid any possible risks.
Selling Rental Property
After you purchase the investment properties, decide how long you want to own them. A long possession will require investment in repairing and maintaining the properties. Both short-term and long-term possession have their own pros and cons. However, for those who own a few properties, long-term possession is beneficial. In case of negative cash flow, sell the home or property instead of incurring loses. With this money, you can take possession of a better property. If negative cash flow continues, then saving money is impossible, rather it may affect the personal income of the investor.
It is to be noted that not all your properties will be occupied in the first months of investment. Hence, do not panic, if you earn less income in the beginning. It is commonly observed that most rental owners do not calculate annual returns. Make sure that you check the cash flow and keep yourself updated about other investment options that may provide higher returns. A major advantage of real estate investment is that it will continue to boom, as the population is increasing day-by-day and obviously, people require homes to stay.