Investing in rental property can be lucrative, but it means choosing the right rental property in the right location, identifying a suitable target market, and setting the right rental price. The goal is to generate enough income from a property to make a profit. Here are some essential steps to help you get started.
Identify your overall financial position
You need to be clear about what you can afford and how you plan to buy a rental property. If you want to get a mortgage for a rental property, mortgage lenders will look at the following:
Your credit score: You need a minimum credit score of 620, and you will get better interest rates and terms with higher scores.
Your debt-to-income (DTI): To get your DTI, you add up the total costs of your monthly debt payments and divide the figure by your median monthly income. The total costs of monthly debt payments shouldn’t exceed 36% of your monthly income.
Down payment: Lenders like a down payment because it helps to lower their risks. When it comes to a down payment, you should generally plan on 15% to 25% of the purchase price.
You can pay cash for a rental property, but if you aren’t in a position to do so, financing can work, especially if you can start generating cash flow quickly. Evernest, Mynd and Timberline offer property management in Colorado Springs, property managers will help you to navigate the buying process and start generating income. New clients receive a one-time 21-day lease guarantee, or the first two months of management are free.
Choose the best-suited real estate investment strategy
When you invest in a rental property, the profit you make will depend on the amount you invest and capital growth.
Capital growth: Capital growth is the increase in value over time, and the area you choose to invest in will influence this. Investing in a large property in an area with little growth may be less profitable than investing in a student apartment in a booming area. Investing in an area with growth potential usually almost guarantees that you can rent it out, and you can benefit from selling when you decide to do so.
Commercial real estate: If you decide to invest in commercial real estate, such as industrial, retail or office spaces, you can yield a high return on your investment, and you will receive monthly rental income from a business.
Residential real estate: Investing in residential property means you will make money from the monthly rent you charge a tenant.
Pick your favorite target market
You need to be clear about what type of tenants you want to attract to your rental property.
Students: If you want to attract students, consider buying a property situated close to a university.
Qualified working professionals: To attract qualified working professionals, you must offer good value for money and at least one or two bedrooms. They generally make reliable renters.
Families: Families prefer to rent homes with two or more bedrooms, outdoor areas and parking space. They are stable renters and usually rent for long-term periods.
Decide on your real estate property investment criteria
To determine whether a rental property is a good investment, you must perform due diligence.
Apply the 1% rule: Use what is known as the 1% rule. You can calculate this by taking the upfront cost of the property purchase and repairs or upgrades. Multiply this figure by 0.01. Consider other rents in the area to see if you can reasonably charge this amount for rent.
Check the cap rate: The cap rate is the return you should generate if you pay cash for a property. Subtract your monthly operating expenses from your gross income and then divide this figure by the property cost. Does the cap rate meet your investment criteria?
Check the neighborhood: Check the neighborhood out and look at the condition of other homes on the street. See what amenities are located close by, such as supermarkets, parks etc. A safe, clean and friendly neighborhood is always attractive to renters.
Join an existing property management company or build your own team
If you decide to manage your own rental properties, you may find that you don’t have the skills, time or energy to do it successfully.
Regular maintenance is necessary to retain a property’s value, and tenants may fail to pay on time or damage the property. There may be times when the property stands vacant. Using a property management company can help you to avoid these issues that can potentially eat into your profits.
Getting started in rental property investments involves identifying your financial position, studying the market, analyzing the property and the area, etc. It can be challenging, but taking the above steps can help to ensure that your investment will be profitable.