Are you interested in buying rental property for additional income? I have been thinking about making a purchase like this for quite some time and am nearly ready to pull the trigger. For the past year or so, I have been researching and planning for a single-family home purchase. After all of my time and planning, I have an excellent handle on what it takes to find the right property that will earn me the best income immediately and for many years in the future.
Study the Demographics
Before you even consider making a real estate purchase, you must understand which neighborhoods are healthy and growing vs. those that have high crime and drug use. While the high-crime area might seem to produce the best bargains, the long-term outlook of these properties is sure to leave you with empty pockets and headaches.
I would advise that you look online at Zillow or Trulia and study which areas are increasing in value and which properties would produce the best rental option for the individuals or families that you would like to see renting your property. After looking at the numbers online, be sure to walk or bike these neighborhoods to get a feel for who lives there and how well they maintain their yards and homes.
By studying the demographics first, you immediately save time by not reviewing homes that are outside of your desired demographic.
Know the Rental Property Values
If you are looking to earn an income with this property, you should know what you can expect for rent (as in the value you can charge your renters each month). Sure, the house might seem like a deal given the area, but if the typical rent amount does not cover the mortgage costs, then it certainly is NOT a good deal for you.
If, however, the rent will cover the mortgage expense, utilities, and maintenance each month, then you likely have a decent deal on your hands and should pursue this option further. Zillow offers a rental estimate that you can look at as a reference point to get a rough idea of what you may be able to charge.
Find a Project Home
As a rule of thumb, if you find a house that is completely renovated and updated, you will not be getting a great deal on this property. It just doesn’t happen. However, if a home has ugly orange walls inside, you might be able to get a $5,000 discount on this home (even though the fix is incredibly simple and cheap).
When I look for homes, I look for ugly houses that can easily be turned into beautiful dwelling places for families. My current home had ugly, worn-out carpet that definitely needed replacing. However, instead of looking at this as an annoyance, I took a peek under the carpet and saw beautiful hardwood floors that were original to the house! I paid $20,000 less than what the house was actually worth, got the floors refinished for $3,000, and today I have a home that is worth $40,000 more than what I originally paid just three years ago. I now live in a beautiful house that could easily be sold or rented out tomorrow if I chose to do so.
You might not be the handiest person, but I’m sure there are still many things that you are capable of doing. Painting is simple and can add much value to any home. Tearing out carpet can be done by anyone, as can vacuuming and cleaning. Tackle projects that you can handle, and add tremendous value to that ugly house.
Take Your Time in Your Search
Far too often, people get it in their heads that they want to invest their money and feel as though they need to take action NOW! Sure, this life moves by quickly, but that doesn’t mean we should rush into investment options that make no sense. I have seen this happen with many of my friends. They have a great ideas (such as buying a rental or getting out of a car lease), but because they have absolutely no patience, they made bad decisions and ended up costing themselves money in the long run.
Wealth does not typically happen overnight, so don’t plan on making a large financial move tomorrow. If you are on the hunt for a rental property, plan on searching for 6 months to a year before finding the property that is right for you.
Have a Large Cash Reserve
As with any business, cash is the key to survival. The same is true for rental property investments. Houses require upkeep, and that upkeep will cost you money. Sometimes your rental homes will only require a hundred-dollar fix here and there, but other times you might have to drop $2,500 on a repair. If you want to get into the real estate game, you must have an emergency fund set aside for the properties as well. As a rule of thumb plan to have 10% of the house value set aside for repairs. This will enable you to act quickly for your renters (it’s always a good idea to serve your customers well) and will protect your large-dollar investments for the long term.
And remember, becoming a landlord isn't always as simple and easy as it seems even for the financially savvy.
Are you ready to invest in a rental property? Share your thoughts and stories in the comments.
This post was originally published on September 25, 2014, and updated on March 31, 2021.