Owning a rental property as investments is becoming a very popular side gig or second income for many Americans. Last year the investment home market increased by 7% and many of those buyers were new to the business.
Some of this increased interest can be attributed to television shows depicting rental income properties as a fun and fast way to earn some extra cash.
But most of the new interest is likely due to the success of local owners and the mentorship that they are providing to others. Before you jump into becoming a landlord there are a few things that you need to know to be successful.
1 – Focus on Your Bottom Line
There are three major benefits to owning a rental property: cash flow, appreciation and tax benefits. Hands down the most critical of the three is the cash flow. The money that is remaining each month after you pay the bills for the property is what you are actually making on your investment not only of your money but also your time. This is the income that you can make work for you if you choose to pay off your personal debt, reinvest in another property or begin to build your savings for retirement. You would also like to think that your property will increase in value but the last decade has demonstrated that is not always the case. So appreciation is great when it happens but never count on that as the only way that you will make money from an investment property. And you will enjoy the tax benefits of owning a rental property but they are not enough of a reason to invest in a property. Always make your cash flow your first focal point and be sure that you are making that important money. All of the rest of the benefits are just an added bonus if and when they occur.
2 – Understand that You Are Beginning a Journey
Before you invest your hard earned money in a rental property, you need to have a clear understanding that you are embarking on a long journey. This is going to be a long term investment and it could take a while for you to begin to see the financial fruits of your labor. Also, know that even if you hire a property manager, you will still need to invest some time on the project. You will want to oversee any construction or renovation as well as monitoring the condition of the property just to see it for yourself. And there could be times when your property manager is busy with another task and you need to step up and handle a situation. This is not an invest and watch it grow scenario, you will need to maintain a level of involvement to be successful.
3 – Understand the Financial Big Picture
You know that you should always be focused on the cash flow but there is more to a long term rental property’s success than just the rental income. You need to know what your competition is getting for rent and what they are offering to their renters. In addition you need to have an idea of where the local market is headed and how you can keep your property at the top of the market. Knowing the market is key for your long term planning and budgeting. You also need to be very thorough when you are estimating your potential carrying costs. Be sure to include the cost of landscape and snow removal, regular maintenance and also vacancies. Having all of these numbers in your budget will help you to better protect your bottom line.
4 – Build a Winning Team
No rental property owner is able to do everything on their own. And if you try to then you will be doing a disservice to your tenants and yourself. When you decide to get into this business, your first alliance should be a reputable local realtor. This person will be able to guide you toward properties that have great potential for long term earnings and steady appreciation. If you are going to need to do renovations or repairs then you will also want to find a great contractor to work with. This is the person who you will trust to get work done on schedule and on budget even when you are not there to be watching them. Your next team member should be your property manager. This is going to be the face of your rental business and the one who tenants turn to when there is an issue. You want someone who is going to work hard for your best interest but also someone who will be an advocate for your tenant when there is an issue. A manager that can keep your tenants happy and keep the rent paid on time is critical to your long term success in the rental industry.
5 – Understand Quality Control
You want to provide your tenants with a nice place to live but in return you want them to respect and take care of your property. This begins with your tenant screening process. You need do complete background checks and spend the time to sort through applications to find the tenant who is going to be the best fit for you and the property. Taking the first applicant may get you a rent payment a few days earlier but it could end up costing you a lot more if the property is damaged or the tenant moves out in the middle of the night. Invest the time to find a quality tenant and you will have a much better experience owning a rental property as investments. Following these five simple steps will help you to begin your rental property ownership experience with the knowledge and skills that you need to be successful. As you grow the business and expand to multiple properties you will find that each new rental will follow these same processes and will grow into a profitable addition to your portfolio.