Investing in residential real estate is an excellent idea for several reasons. For one, it’s a great way to diversify your asset portfolio, and it can also serve as an additional source of income.
However, the problem for most investors isn’t deciding whether to dive into rental property investment or not; it’s how to get started.
Thankfully, kick-starting a rental real estate investment career isn’t as challenging as most people think, and there are multiple lucrative options to choose from.
This article will provide first-time investors with valuable tips on how to invest in real estate. But first off, let’s look at the different types of rental real estate properties.
Understanding the Different Types of Rental Real Estate Properties
Rental properties are residential or commercial buildings rented out to tenants over a specific period. These properties are either short-term or long-term rentals, depending on the tenure of the lease.
The beauty of rental residential and commercial real estate properties is that there are different types that you can invest in. Examples of residential rental properties include:
- Luxury homes
- Vacation homes
- Single-family homes
- Multi-family homes
Residential properties are typically the ideal real estate asset class for novice real estate investors because they require relatively less capital than commercial real estate. They’re also easier to manage, although there are a few exceptions.
On the other hand, commercial rental properties have longer leases, making them a more secure investment since landlords won’t have to look for a new tenant often.
Also, most property owners lease commercial buildings under a triple net lease, which puts the tenant in charge of the property’s operating costs. As such, there’s less administrative responsibility for the landlord to deal with. That said, commercial rental properties typically include:
- Retail stores
- Industrial buildings, such as warehouses
- Office spaces
Typically, in rental property investment, the type of property you opt for depends on several factors, including your budget and investment strategy.
However, a vital element in succeeding in rental real estate, especially if you’re a beginner, is knowing what makes a rental property attractive to tenants. If you’re unaware of the qualities of a profitable rental property, you may end up losing money buying the wrong home.
On that note, the next section in this rental property guide will discuss what you should look out for before buying rental property.
Qualities of a Profitable Rental Property
Knowing what to look for in a rental real estate property will help you avoid some investment pitfalls. Quickly, here are some qualities you should consider while you’re on the market for rental real estate:
Location is the most vital factor in real estate for landlords and tenants. The neighborhood of your rental property typically defines the demographic of tenants you’ll attract.
For example, building a multi-family home in an area filled with students or single folks isn’t exactly a wise investment because you may struggle to fill the vacant apartment.
But demographics aren’t the only vital factor determining your investment in a location. Schools, crime rates, and the future development of a neighborhood are also elements you should consider.
For example, if you’re investing in single or multi-family units, you generally want to consider areas that are closer to schools and transportation links. That’s because these apartments are typically for working-class families who don’t want to spend all day trying to get their kids to school before making it to work.
Property taxes typically vary, depending on the location. As such, some areas may have higher taxes than others.
However, if you’re buying investment property in a neighborhood with high taxes, ensure it’s a vicinity where you can attract high-quality, long-term tenants. Otherwise, you’ll lose a lot of money paying taxes for a home you can’t rent out to anybody.
Profitable rental properties are typically in neighborhoods closer to public amenities, such as grocery stores, restaurants, hospitals, parks, gyms, and public transportation.
If prospective tenants are going to struggle to locate these local facilities, then they’ll be less interested in renting your home.
Areas that are hotspots for employment opportunities are generally attractive to tenants, especially young people. As such, owning a rental property in these locations means you won’t struggle to get occupants for your property.
Also, when the apartment goes vacant, you’re likely to get a new resident in no time. If you’re not sure which locations in the US have the most attractive job opportunities, you can check the US Bureau of Labor Statistics to get an idea of where to invest.
Tips for Investing In Rental Real Estate
Real estate investment is a complicated venture, even for the most experienced investors. However, there are a few pointers that can help you navigate the journey and improve your chances of success, especially if you’re a novice.
If you’re a first-time investor, here are some pointers on how to invest in real estate:
Find a Location
Location is arguably the most vital factor in real estate investment. The location of your rental property determines the home’s attractiveness alongside the quality and demographic of tenants that will demand for it.
As such, location should be the first thing to consider before everything else. That said, you should generally seek to invest in areas that have the qualities that tenants are looking for, such as public amenities, schools, job opportunities, and access to public transportation.
An area with a high potential for future growth and zero crime rate should also be at the top of your list.
Decide What You Want to Buy
Another vital step in rental real estate investment is deciding the type of property to invest in. Rental Real estate is typically divided into residential and commercial buildings.
Each of these categories of properties also has different types. For example, single-family homes and vacation homes are classes of residential real estate, while retail outlets and office buildings are types of commercial real estate.
Of course, the location of your property plays a role in the real estate class you opt for. For example, if you want to invest in residential real estate and you’ve chosen a location with high-income earners, luxury homes would be an ideal pick.
On the other hand, single and multi-family units are ideal for areas with a high percentage of married people.
Cash or Mortgage?
Once you’ve sorted out where and what type of property to buy, the next step is to figure out your preferred financing method. Are you paying for the property with cash or an income property mortgage?
Of course, the preferred option depends on your budget. If you don’t have the cash at hand and would instead opt for a mortgage, it’s best to immediately work on the required processes, such as saving for your down payment.
Pay Off Your Debts
If you’re paying for your rental real estate investment with a mortgage, then you need to put yourself in a solid financial position to qualify for a loan by paying off any outstanding debts.
Get to work on clearing any student loans, car payments, or credit card debts on your financial record ASAP.
If you do it right, investing in rental real estate is a lucrative venture. If you’re a first-time homebuyer and you’re not sure how to invest in real estate, the tips in this article will help you avoid any significant pitfalls along the way.
That said, don’t rush into buying a rental property without carrying out due diligence. The property investment market can be a landmine; as such, ensure you’re only taking calculated and well-advised risks