The 2021 Rental Property Guide – Five Handy Tips You Must Know Before Investing

There are several ways you can make money in real estate. Some of these methods are passive, while others are active. Since land and property values appreciate over time, it’s best to invest in assets with long-term profit prospects.

Rental options are an excellent property investment for beginners and experienced investors, allowing them to reel in massive profits over time. A rental property – also known as an investment property – is a commercial or residential building leased out to tenants over a certain period.

Some characteristics that make investment properties such a lucrative prospect are steady cash flow, value addition, and tax incentives. You might want to purchase your first rental property soon, but it’s essential to make a few background checks.

As with any other real estate investment, rental properties have strengths, pitfalls, and learning curves. Therefore, it follows to research them before going through with your first purchase. Thankfully, this rental property guide highlights five essential tips that could help you get the best deal from your rental properties. Let’s delve right in!

Have a Hands-On Approach to Property Management

One of the first things to note before investing in rental properties is your readiness to manage them first-hand. Do you have what it takes to be a hands-on landlord? It’s an important question to note, especially for those interested in investing in a rental property for beginners.

It helps to know how to make repairs, maintenance, and other house-fitting activities around the property. Any reputable rental property guide would tell you that such skills would help you save more money you could have spent on contractors or a property manager.

However, you could relax it a bit as you add more properties to your rental portfolio. The recommendation is to have a team of repairmen and cleaners that you directly manage. This strategy allows you to keep maintenance from eating deep into your profits.

Lower your Debt Profile

When it comes to rental properties, personal debt can be a significant hindrance to your purchase chances. While big investors looking to expand their portfolio investments can leverage a good debt profile, the average person may find it a bit more challenging to get funding for a rental property.

Therefore, it’s best to pay down any personal debt you might have leading up to your proposal to buy an investment property. That includes student loans, medical bills, and college funds. However, you don’t necessarily have to pay off your entire debt profile before you’re eligible for a rental property purchase.

You can go ahead if your projected returns are more significant than your debt balance. Bear in mind that you’d need meticulous calculations and caution to avoid situations where you can no longer service your debt.

Make the Down Payment

Down payments are more complicated than you might think. That’s because investment properties tend to have higher down payment requirements than occupied ones.

Generally, most investment properties ask for about a 20 percent down payment. What’s more, you won’t find a mortgage facility for rental properties, leaving you to explore other alternatives like taking out a personal loan from a financial institution.

Cash Purchase or Financing?

You must note that you have two main options to getting your rental property – cash purchase or investment property financing. Both have their peculiar advantages, depending on your preferences and goals for the investment in the short and long term.

Paying cash for a rental property allows you to record immediate positive annual returns on the investment. For instance, if you bought a $100,000 investment property in cash, you’d get around $9,500 yearly profit after tax, depreciation, and other deductions. That translates to a 9.5 percent ROI on the $100,000 property.

Alternatively, you could use the property financing approach, as it gives you a better profit outlay, albeit at an initial loss. Using the $100,000 property example, you can put down 20 percent upfront with a 4 percent interest. Factoring the additional costs, taxes, and other deductions, you can only make roughly $5,500 annually.

While that’s low for the investor, they stand to make up almost 28 percent annual return on the $20,000 upfront payment.

Steer Clear of High Mortgage Interests

One rental property investment strategy you should never joke with is steering clear of high mortgage interests. Securing finances for your rental property is straightforward once you have your debt profile in check and meet the purchase requirements. In some places, financing facilities are pretty cheap, especially from the last few years.

However, the cheap cost of borrowing money often hides a critical detail: high interest rates. Typically, interest rates for finances towards investment properties are higher than that of traditional homes. Therefore, it’s best to consider your options and settle for a mortgage payment that wouldn’t cut deep into your rental profits.

Thankfully, financiers can’t set their interest rates discriminatorily, so you can approach the Department of Housing and Urban Development if you feel you’re getting charged a higher rate than anyone else due to race, religion, or sex.

Bonus Tip: Pick a Suitable Location

No beginner friendly rental property guide is complete without telling you how helpful it is to pick a lucrative location before making the purchase order. It’s essential to go for places whose real estate market is stable or on the rise, as that’s how you can have guaranteed rents.

Beyond that, it’s best also to pick the location for rental properties based on markers like low property tax, readily available transportation, utilities, and low crime rates. The renters’ population is likely more enormous in areas that have these features available.

Wrapping Up

If you’re considering buying a rental apartment, you’d be happy to know that it’s an excellent real estate investment choice. It’s one of the few ways to make passive income in real estate, and many wealthy investors have tried it in the past.

However, you need to pay close attention before committing. You’d want to avoid the many pitfalls along the way and save your money as a result. Our explanatory rental property guide above could help you navigate the purchase process more seamlessly, to enable you to earn more long-term profits and be a better rental property owner.