Investing In Rental Properties For Beginners | Property Investment Advice | Your Finish Rich Plan

July 12th, 2009

Investing In Rental Properties For Beginners | Property Investment Advice

No matter the economic situation, investing in real estate has been and probably will always be a great way to make money. There are many ways to make money in real estate, but investing in rental properties is one of the most lucrative, because you make money two ways. First of all, you get a steady stream of residual income from the monthly rental that you collect from your tenants; secondly, since property prices tend to rise over time, you build equity as time goes on. Being a beginner in the world of real estate investing can be very frustrating if you do not know some tricks of the trade, but as with anything worth fighting for, determination is the key to success, as you learn the ropes and get better and better at making profits and creating an extra stream of passive income.

How To Invest In Rental Properties As A Beginner

Create a company, preferably an LLC to buy real estate in. You can certainly get started without going through that process, but for all sorts of reasons (and especially liability issues) it’s recommended that you keep your real estate investments and your personal assets separate. Now if you’re going to create a company, do it before you start the buying process. It will be a lot more difficult to move your real estate properties into a company later than to buy it under that company from the beginning.
Find a realtor. Realtors, as real estate professionals, have access to all sorts of information that you’re not necessarily privy to. They are familiar with the characteristics for a good rental property. A realtor also can help with a market analysis for that area to see if the home is really worth the asking price. Getting a good realtor who understands what you’re looking for in purchasing rental property, that you’re comfortable talking to, and who has your best interests in mind can prove invaluable. If you do choose to work with a realtor in your search for rental property potential investments, choose one that has a good reputation in the community. Some real estate agents may double as property managers and will agree to show and find tenants for your rental property, for a percentage of your rent, of course.
Get your financing together and keep accurate records from the start. Despite what you may have heard, getting financing for rental properties is not easy. You have to have very good credit and be able to put down 20 percent of the purchase price. It’s different from getting financing for residential property, where you can quality for financing with as little as 5 percent down, and a lower credit score. Keep in mind that not all banks will lend you money for purchasing rental property. If you’re unable to secure financing, consider partnering with a trusted friend or relative, especially if that person can fix up the property and/or handle necessary repairs down the line. When you’re just starting out and are approaching a bank or a potential investor, they will want to know exactly what type of finances you have and will need. You need to have an accurate account of the money needed to purchase the property, the down payment, closing costs, repair costs, etc. Similarly, once you get things going, you won’t know how much money you’re making or what you need if you’re not keeping up with your expenses. Be prepared if it will be some time before the property is ready for tenants, as you will have to pay the monthly mortgage until it is rented. Keep a projected financial balance sheet. Have accurate estimates of monthly income and expenses for each property. Don’t just guess. Research rental property in the area.
Get out there and start looking for properties. Finding a house for a great price, doesn’t necessarily mean that you’re getting the best deal. Hire a professional home inspector to check the property from top to bottom, inside and out. If it is built on a firm foundation, you have yourself a possible deal, but if the foundation is not sturdy, do not even bother with it. For your first rental purchase, avoid buying a house in need of a major renovation because as a beginner, odds are you don’t have the knowledge/money/time to handle that.
Prepare for repairs. Repairs are inevitable. If necessary, before moving in your first renter, repair and replace anything that needs a major overhaul, such as flooring or appliances. It is in your best interest to have appliances in your rental property. Most people who are shopping for a place to rent do not have their own major appliances. An added bonus to any rental property is a washer and dryer hook up. If your rental property is not washer and dryer ready, have the hook ups installed, it is fairly easy to do. Of course, ideally, and especially if you’re a beginner, you might want to look for properties that require little or no repairs to get it ready to rent: the longer the down time required for you to make repairs, the longer you’ll go without income from the property. Never forget that you still have to make the mortgage payments.
Screen your renters by checking their credit and references. Have your prospective renters fill out an application. On the application ask for personal and work references. Before making any promised commitments, check all references. The most important information you can obtain in this process is from a current or recent landlord: does the applicant have a history of paying rent on time, keeping the property in good repair, and have income (or a cosigner). If an applicant doesn’t have a reference, there is usually a reason. As for credit scores, an applicant with good credit is likely to be someone who manages their finances well and who is less likely to give you financial trouble, meaning late payments or no payments at all.
Renting out the property. Require a deposit of at least half of a month’s rent but ideally, get one month’s rent. Some landlords require an up front rent payment of the first and last months rent to cover unexpected problems. That money should be put into a savings account, available to be withdrawn if both should be refunded to the renter when he decides to move out. If the renter leaves the property damaged, use the “deposit” to cover clean up or repair expenses. If the renter leaves the property without paying, the “last month’s rent” will take cover that problem as well.
Sign a lease. In addition to the signed agreement of the house rules, have your tenants sign a contract for 3 months, 6 months or 1 year. This is to ensure that you will have a constant income of rent. If a tenant signs a contract for a year, consider giving a discount on the monthly rent.

General Property Investment Advice

Find motivated sellers so you can buy your properties for a good price. These are the property owners who are motivated to sell their property to save their business or solve any personal problems. Common examples include people who have already bought their next house and are paying two mortgages, couples going through a divorce, or out of town owners.
Accurately estimate your property taxes. Lots people go by the taxes from the year during which the property was purchased and think they can use these numbers to guess everyday expenditures. This is not always the case as taxes change every year and more often than not, they rise after a property is purchased. So if you want to be on the safe side, just presume that the taxes will increase on the property after you buy it
Account for vacancies. Although every landlord would hope that their properties will be rented all the time, such an assumption is simply not realistic. There will most likely be times when your property will be vacant. In general, you should incorporate on average a 10% vacancy rate into your calculations. Also, occupant turnover costs money: advertising for a new renter, repainting, clean-up, etc, all that takes money. If damage was done to the property, the full amount of restoration may not be wholly covered by the security deposit charged.
Insurance. Insurance premiums for rental properties are typically higher than owner-occupied properties. Approach insurance companies to see how much you’ll be required to pay instead of using the insurance cost for your own home, which will likely be lower. In addition, you should get coverage not only for property insurance but also for liability insurance and in some countries, for defective title indemnity insurance.
Utilities. If the property has previously served as a rental property, find out precisely what the previous landlord paid for and what was paid for by the tenants. You must also know whether you will be accountable for additional costs such as garbage collection.
Deduct property management fees if you’re not going to manage the property yourself.

Being well organized is probably the biggest tip for investing in rental property for beginners. But at the same time, there’s no doubt that not everyone is cut out to be a landlord. Anyone interested in investing in rental properties should take several courses before jumping in. Investors not only need to understand the financial side, but also the legal side, such as landlord-tenant laws.