Investing in Rental Properties & Making Money
Buying rental property is a popular form of investment and can be a profitable one. Though the process of buying rental property may seem simple, it is possible to lose money on rental property. As with any investment, it takes careful research and planning to be successful with investing in rental property. Before starting in rental property investing, investors must understand how the properties produce income and what it takes to successfully invest in rental property.
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Income Sources
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Rental property can create income for an investor in various ways. Rental property produces a monthly cash flow from rent payments. Well located rental property will also increase in value over time. This increase in value will not only create income when the property sells, but owners can also use the value as collateral for loans. Rental property also produces significant tax advantages that owners can use to reduce their yearly tax burden.
Selecting Properties
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It is important for investors to choose properties that will attract tenants, whether the property is commercial or residential. Properties in bad neighborhoods will not only be difficult to rent, but will be expensive to insure, and the problems in the neighborhood may also cause property values to fall. A good rule of thumb is for owners to only invest in neighborhoods where they would want to live or work. Conversely, bad properties in good neighborhoods may provide a great opportunity for an owner willing and able to renovate the building.
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Financing Rental Purchases
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Lending guidelines for rental properties are more stringent than guidelines for primary residencies. Lenders will require investors to have higher credit scores and larger down payments before approving loans for rental property. Before shopping for rental properties, it is a good idea for potential investors to meet with a few lenders to arrange pre-approved financing. This will help the investor to determine a budget as well as to determine what loan terms will be offered. Investors should not use all of their money for a down payment as investors must have access to money after the purchase to make any unforeseen repairs or improvements that the property may need.
Managing Rental Properties
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Potential rental property investors must also determine how they will manage the property. Professional property managers offer a number of advantages, but the cost of the service will decrease the investor's profits. Professional property managers have experience selecting tenants, are familiar with tenant / landlord laws and regulations and will deal with late-night calls for service. If interested in using a property management service, investors should meet with a few of them before making a purchase to determine their fee structure and what services they provide.
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References
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