Many people are turning to rental properties as an alternative investment strategy to generate passive income. Before you dive in, there are a few things you should think about. Here are some pointers to get you started with your first rental property.
Select the Type of Rental Property
When you first start out, you may be considering various types of rental properties. This could be an Airbnb-style or short-term rental, a long-term tenant rental, or a commercial rental property, all of which can drastically alter what you require.
For example, if you want to rent out various commercial property management companies, you may need to hire a commercial property management company. This is not the same as converting a residential home into a long-term rental property.
The following are the most common types of rental properties:
- Single-family homes
- Vacation homes for short-term renters
- Townhomes
- Condominiums
- Multi-family homes
- Apartment buildings
- Businesses
Begin with your financials.
Once you’ve decided on the type of real estate investment you want to make, you can start looking at your finances. With any type of rental property, you are essentially starting a business, so having a solid plan in place is critical.
Handle Your Current Debt
When you invest in real estate, you will inevitably incur debt before you can begin earning an income. As a result, you should first make sure that you have paid off the majority of any personal debt that is hanging over your head. This includes any current mortgages, credit card debt, student or car loans, as well as any other payment plans you have in place.
Increase Your Savings
Then, make sure you have some type of savings set up for various renovations, repairs, and other expenses that may arise that you did not anticipate. This could include your downpayment, insurance, permits, or any other unexpected situations that may arise, such as a roof repair or plumbing problem.
Calculate Your Expected Earnings
Once you’ve gotten your personal finances in order, you’ll want to speak with a lender or financial advisor who can help you calculate your expected earnings. This will, of course, vary depending on what you charge for rent, the length of vacancies, interest payments, and renovations such as adding solar panels to your home.
Do Your Market Research
The location is the single most important factor in the success or failure of any rental property. Many factors can influence where you decide to build your rental investment. If you want to start a vacation rental property but want to look in a suburb because the homes are cheaper, you might not do as well as if you bought a condo in a high tourism area.
On the other hand, if you want to make a significant investment in an apartment complex but try to buy commercial real estate where the rental market isn’t as lucrative, you’ll end up losing more money than you could make.
This is why it’s critical to conduct market research based on the type of investment you’re looking to make, as well as various locations that might best suit your needs.
Understand the Laws
As previously stated, each type of investment entails a unique set of responsibilities and expenses. This includes the legal aspects of your property. If you work in commercial real estate rather than residential real estate, you may require a completely different set of permits.
You will also need to understand legal leasing agreements for tenants as opposed to a small business in an office building. This is why we always recommend working with a property management company to ensure you are set up for success rather than getting into legal trouble later on.
These are just a few of the steps you’ll need to take when getting started with a real estate investment. An endeavor like this necessitates a significant amount of work and research. Before you dive in, take your time and do your research. In the long run, you’ll be glad you were patient.
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