10 Tips for Investing in Rental Real Estate

Written by: CashAdvice Staff

Putting your money in rental real estate is one of the answers to financial freedom. Below are ten tips to help you excel.

1. Find a motivated seller

One of the basic rules is to buy well. To buy well, there are no secrets, you have to buy someone who really wants to sell. The first rule of rental investment is simple: you make your profit from the purchase, not the resale. If it’s not the case, it’s not worth it.

If you buy too much, perfect management will often not restore the profitability of your investment. One of the reasons you are advised to buy at the right price is that you absolutely can not know the state of the market at the time you want to resell and so it would be a bit surreal to bet on an increase the price of the property.

By focusing on immediate profitability, you guard against several things, including the fact of having to sell your property if you cannot afford to maintain it.

Find a seller who does not earn money with his investment, who lives far away from his property and who has to move, who is poorly informed in the market, and you have a good chance of buying at a reasonable price.

The purchase price is decisive, and the rent that you can also draw. Do not pay too much for the property and do not overestimate the rental value.

2. Define your target

At a first investment and according to our borrowing capacity, the choice is often made between a studio and an F2. Regardless of your choice, you must be consistent and use common sense. If you target students, small areas are traditionally reserved for them.

The consequence is that the location will have to be chosen according to the target. Everyone knows that location is one of the critical factors for a successful investment, but on the ground, reality often picks up on it.

Also, in the example of our student studio, the environment of the property is decisive. If you intend this studio to young workers, the criteria are different. Know who you are aiming for. Depending on the population, there are known advantages and disadvantages, for example, the fact that the student stays for a short time and regularly needs the search for a substitute but benefits from the parental guarantee.

The location should not be chosen in spite of a low attractiveness.

3. Embark on thorough research; pay visits and offer a few suggestions

Wisdom dictates that you have to visit a lot of goods to make a purchase. The search method can be confusing because the media are very numerous: the internet, newspapers, real estate agents, and so on.

Level 1: internet

The attractiveness of the city or neighborhood good? The factors that attract people are simple: work, schools, and reputation. If there are many jobs, the city attracts locals. If she has a good reputation, it’s even better. University cities are also popular with students.

Other elements are interesting: casinos, airports, national events, and administrative buildings.

A limited supply of goods? If there are too many goods, you run to disaster.

Quality of adequate infrastructure? Is the city or neighborhood adequately managed? Are investments made on time?

Economic activity progressing? Quite delicate at the moment, but it remains an important indicator of your choice. Diversity from this point of view is essential. Avoid cities that only depend on one significant employer.

Level 2: People and Trends

Meet, discuss, and check your findings with local people. Are your conclusions validated?

Could you define the trend and imagine how the neighborhood will be in 10 years?

Are there any constructions or changes likely to influence the market? (rental demand, the value of the property)

Level 3: immediate environment

Shops, schools, and transport are the 3 key points. The immediate environment determines the attractiveness of a property for a tenant. He is willing to concede things to the building or neighborhood, but he must have the elements he needs nearby. The environment is not editable.

There is never a single market, even in a neighborhood. Sometimes a few streets are enough to end up in a very different environment. Know differentiate sub-markets.

Number of properties to visit

The number of properties to visit can be limited by the configuration of places, but the basic principle is simple: the more you visit, the more likely you will find a beautiful property. It can be to visit 40 or 50 apartments without any problem. It takes time but it is the price to pay to find the diamond in the mine.

The visit of the property should start only after having made your research and defined your objectives because it allows you in a few moments to make a decision.

Ideally, you buy your property from someone who has not yet sold it. You want to avoid being in competition with all investors.

4. Buy next to you

This criterion is simple, but I make it a point in its own right. Always buy near home. The alternative is to buy in a place that we know well (for example, the city where we come from). Proximity is necessary for 2 reasons:

  • really know where you buy,
  • to be able to intervene in case of a problem.

If you manage the good yourself, it is all the more preferable to be close.

There are, of course, many examples where remote management is going well. What I want to avoid is having to go urgent once or twice to solve a small problem that requires my presence, and that discourages me.

5. Build your partners comprising of individuals that understand how to invest in rental real estate

You must consider that the first investments are a learning process. A real estate agent, a notary, and an accountant are 3 members of your team that you must select with care. Sometimes finding a good craftsman is also necessary.

Other members may be architects, insurers, bankers, and surveyors.

If you really want to be serious in this area, you will have to create a team.

If you are investing with a partner, look closely at yourself:

  • are complementary,
  • can debate healthy about an idea,
  • work and harvest the rewards apart equitable,
  • have the same goals,
  • share the same values.

6. Unplug your instinctive side

It is necessary to analyze the goods rationally. The best way is to establish a written list (typically in Excel) of criteria. The list of criteria guarantees that you do not fall in love with a property and that you compare the different properties correctly.

Analyze the good from every angle. The elements to look at are numerous, but that does not mean that we must avoid controlling them. If you find a problem, this may not be a reason to cancel the purchase but to negotiate the price accordingly. In this case, nothing is worth a quote from a serious professional to perform the repair.

You will find here a more complete list of the checks to be carried out before a rental investment.

In general, a tenant will be less demanding than a buyer. This is a point to remember.

7. Do your profitability calculations

Calculate the profitability of your investment. Below 6% net (after taxes), the investment is debatable. You must not have surprises.

The price charged by the seller has no basis. It is often based on its expectations or on an estimate itself based on questionable data.

It’s up to you to calculate the price you can give based on the return you want. For this, you must obtain the rent price and be sure that it is the real rent. Trust but check.

Often, the goods will be overvalued, but that does not mean that you have to conclude that you are wrong. You buy a financial income, not stone. If the income is not good, your investment is missed.

However, two other elements can play in your favor:the potential rent and the future rent.

The potential rent is the rent the current owner could obtain by making a few simple changes. These are the same changes that you will be able to do immediately to raise the rent.

The other point, the future rentcorresponds to the supposed progression of the rent based on the property, its environment, and the ceiling of increase framed by the law.

Maintenance costs should not be underestimated. The older the building, the more expensive the maintenance is a general rule that you can follow.

8. Finance your investment by not forgetting that you are looking to invest in rental real estate

Searching for financing can be lengthy, but to avoid losing an opportunity, it is good to check your borrowing capacity before making an offer just as you would have done to buy your own home.

9. Do not fail to do the right thing and stay informed

What grabs the beginner during a first investment, he usually loses later to his regret as a self-fulfilling prophecy: you can not win with real estate.

The professional investor does not hesitate to do the right thing, whether it is marketing to rent the property, insurance to protect himself or lawyer from studying a thorny problem before the purchase. There are areas where you should not make small savings, and the entire study before buying a property is critical.

On another aspect, all the news may interest you to follow the value of your property: crime and investment in infrastructure are two crucial elements.

10. Find a good manager

Management is a critical point. If you bought well, the management could ruin your purchase and your cash flow. Even if you do not plan to entrust the property to a manager, plan a margin in your calculations for this eventuality.

Be patient.

Be informed.


Related Posts

10 Tips for Investing in Rental Real Estate

Share Tweet