When it comes to putting your money to work and building sizeable wealth outside of your main job, rental properties are the way to go. Not only are you able to generate monthly income, but you also benefit from real estate appreciation. But if you’re going to try your hand at real estate investing, there are some things you need to know.
Here are a few tips for the ambitious, yet green rental property investor:
- Know What Makes a Good Property
Want to be a successful real estate investor? Do your research on the front end and only invest in properties that fit your criteria.
When searching for the right rental property, there are numerous factors to consider. Some of the most important include: neighborhood (location), property taxes, school zoning, crime rates, local job market, amenities, plans for future development, number of listings and vacancies, rental rates, and insurance (flood zoning, etc.).
- Run the Numbers (Conservatively)
It’s easy to fall in love with a property when you like the way it looks and believe it’ll be easy to manage, but you should never think seriously about an investment until you’ve run the numbers.
You need to know exactly how much money you’re going to cash flow each month before investing. While numbers have a way of changing in the real world, you can get pretty close by thinking about issues like vacancies, maintenance issues, repairs, and other expenses. Brandon Turner of BiggerPockets has a comprehensive guide on how to calculate cash flow.
- Develop Solid Contracts
As a landlord, legal protection is the name of the game. You want to foresee any major problems ahead of time and include them in lease agreements and contracts as a way of protecting your best interests and avoiding complicated issues down the road. It’s natural to be trustworthy of tenants and think that all payments will come on time; that they will leave the property in top shape; and that people are generally good. While that may be true, it’s never a good idea to throw caution to the wind and be one hundred percent trusting of everyone you meet. You will need watertight agreements with your tenants, so that if ever you have to pursue things legally, you have enough signed documents in your favor. If you read up on how to present evidence in small claims court, then you will see that having written contracts are one of the first things spoken about.
- Screen Tenants Carefully
A good property is important, but tenants are the make or break factor in your investment. Good tenants will make your life easy, while bad tenants will cause you stress around the clock. In order to avoid situations where bad tenants occupy your properties, you’ll need to have a strict screening process in place.
“Look for candidates that have a strong history of payments, a reliable job, intentions to stay in the area for several years, and a good attitude overall,” Houston-based Green Residential explains. “Even if it takes you three months to find the right candidate, you’ll save yourself trouble in excess of the additional costs you bear.”
- Build Strong Relationships
Real estate investing, like other business endeavors, is all about relationships. The more healthy relationships you build with people who matter – like real estate agents, lawyers, accountants, handymen, tenants, etc. – the more you’ll thrive. While it’s tempting to isolate yourself and do everything on your own, there’s value in camaraderie.
- Take Care of the Property
Finally, don’t wait until a tenant moves out to inspect your property and take care of issues. By this point, you may find that your rental is falling apart and needs thousands of dollars in repairs. Be proactive about repairs and maintenance and hire a property manager if you need help handling the day-to-day requests that will inevitably arise.
Don’t Move Too Fast
If your first rental property experience is positive, you’ll feel an immediate urge to invest in a second, third, and fourth rental property. And while there’s nothing wrong with building up a portfolio of profitable investment properties, be wary of scaling at an unsustainable pace. Make safe, smart decisions and only add properties as you have the time and money to properly manage them.