How To Set Up A Rental Investment Property

Posted On Monday, 02 November 2020 21:43

For real estate investors, rental properties investing can be a great starting point. Generating value from appreciation and providing cash are only two of the benefits that rental properties bring. If you own real estate, you can also enjoy tax incentives and deductions.

If you’re still a newbie in the rental properties investing game, this basic guide is for you. Read on to learn how to set up a rental investment property for success.

What’s A Rental Property?

Of course, before getting into the tips on setting up a rental investment property, it’s of utmost importance to really understand how rental investments work first. So, what really is a rental property?  Well, it’s a commercial or residential property that will be rented or leased to a tenant in a specified time period. Long-term rentals can be up to three years and often involve a lease. Vacation rentals and other forms of short-term rentals, of course, also exist.

The different types of commercial rental properties are the following:

• Multi-use
• Retail space
• Office space
• Industrial (such as a self-storage or warehouse)
• Multifamily

On the other hand, residential rental properties include:

• Quadplexes
• Triplexes
• Duplexes
• Single-family homes

Because they’re less expensive, beginners often opt for residential rental properties more. They’re easier to obtain financing because less money will be required upfront. Residential rental properties tend to be easier to manage, too. Managing one tenant is easier when compared to managing 20, in most cases.

Now, take a look at the following steps that have to be taken when setting up your rental investment property:

1. Figure Out Where Exactly You Want To Invest

Newbie investors often prefer buying rental properties that are located in their backyard. What that means is that you’re purchasing a property in the same state, the same city, or the same zip code as your current residence. Of course, it’s not always the best choice or may not be available depending on the market of the location you’re living in. 

For instance, rent may not be able to support a rental property with a positive cash flow if you’re living in a neighborhood, city, or state where values of property are on the market’s upper end. That’s especially true if you’re living in places like San Francisco, where the market is expensive. A single-family property on average can be around USD$1.6 million in expensive markets. That being said, look or consider other markets where you could have your first investment if you don’t have enough funds available to purchase a property nearby.

You should view other markets at a high level if investing in your backyard isn’t possible. The following criteria must be met:

• Vacancy rates and housing supplies are low, which means that there’s a high demand for rental properties, so occupancy rate is high.
• There’s a growing or stable job growth; there’s population growth, employment growth, and economic expansion.
• The purchase price of your rental property can be supported by the average rental income. Average rental income should also be aligned with the available funds you have to invest. 

2. Join AN REI Or Real Estate Investor Club

If you want to obtain networking opportunities, then, joining a local association or club made up of real estate investors is a good idea. Doing so can help you find a partner. It’s also possible to get acquainted with someone who may be able to help you further your rental property business plan. In real estate investor club meetups, there’s always someone who’s willing to lend you a hand since these activities are designed to help attendees. You’ll gain helpful insight into real estate professionals in your chosen market who are most likely doing the things you want to do already.

3. Analyze The Rental Property You’ve Chosen And Run The Numbers

It’s crucial to figure out a rental property’s cash net flow. How do you calculate the cash net flow?  You only have to subtract mortgage payments and other expenses from the rental income. If the goal is to generate positive cash flow, then, cash net flow is especially important. 

The first thing to do is, of course, to determine the amount you could collect in rental income. Also, confirm that your tenant is actually paying market rental rates if a tenant is already occupying the property. 

Keep in mind that there may always be a potential for rent price increase. That’s why verifying if your property is in a similar condition to comparable rentals is important. If your rental property is lacking amenities or outdated when compared to the other homes within the neighborhood, then, you may be required to do renovations or some upgrades if you want to reach market rent.

Aside from market rent, the average vacancy rate should also be identified for your specific market. You can base on the type of property you’re buying to do this. To get the information you need, use a real estate data tool or census data.

4. Prepare The Lease

The responsibilities of both tenant and landlord will be outlined in a binding agreement known as a lease. The document often includes:

• How to remit payment
• Rent due dates and fees for late payment
• The process for repair requests
• Instructions for parking vehicles
• Restrictions on painting
• Rules on property alteration
• Whether pets are allowed

Final Thoughts

There’s a lot for every aspiring rental property investor to know despite investing in rental properties being one of the most lucrative real estate investing methods. Hopefully, the information in this post can help you put your best foot forward when you start setting up your rental property.

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