Investment property can be a great way to earn a good income without having to do significant amounts of work. Some call owning rental property a passive income strategy, but owning physical real estate is never truly passive — many things require your involvement. However, you can earn substantial returns and build a nice source of income through investment property.
7 Success Factors to Help You Start Investing in Rental Property
Here are some critical pieces you need to know before getting started with real estate investing.
#1 – A Good Real Estate Agent
As you are looking for a property to purchase, you need to be patiently aggressive. What I mean by that is you don’t want to hop on the first property you see just because you are excited about getting into an investment property.
However, if you do find a suitable property that will have a positive cash flow, you need to move quickly. There are other investors out there doing the same search you are who have more experience. They can snatch up a property before you even have a chance to truly consider if you want to buy it. That means you need a good real estate agent that can help identify the right deals for you and will show up timely showings.
#2 – A Good Lender
You also need a good mortgage lender that pre-qualifies you for the loan and will move quickly to close. You don’t want to miss out on a great property because someone was dragging their feet through the loan process. You will also, of course, need to have cash on hand for a down payment — most lenders require a 20% down payment for an investment property purchase.
#3 – Reserve Funds for Repairs and Marketing
In addition to your down payment and closing costs, you will need to have money for repairs and marketing (you know, to find a tenant for your property).
Renters won’t take care of your property the way you would. That means they will cause more damage to the house over time. Additionally, things do break down over time — e.g., garage door openers need replacing, roofs spring leaks, the heating unit goes out, etc. All of these problems require money to fix. You need to have reserve money available just in case something breaks.
#4 – Finding a Good Tenant
Of course, for a rental property to be successful, you need a tenant. But you don’t want the just any tenant, you want a good one that takes care of your property and pays you on time.
It is wise to get advice from others you know personally or professionally on how to properly screen renters. The same real estate agent that helped you acquire the property should be able to help you lease out your property, screen the renters, and set up a lease that protects your interest.
You want to have a lease agreement that not only spells out the basics of rent cost and term of the lease, but also things like damages, late fees, and responsibilities of the tenants and landlord.
#5 – Patience
Throughout the entire process of buying and renting out the property, you will need loads of patience. Finding a suitable property that will generate positive cash flow can take time. Finding good renters that won’t ruin your rental takes time. Hiring a contractor, plumber, or electrician to fix a problem takes time.
Patience is the key to being successful. Make deliberate, thought out moves.
#6 – A Business Attitude
You must come into the process with a business attitude. This is your money on the line. You’ve likely invested thousands of dollars in the down payment, closing costs, and repairs to put the property up for rent. The purpose of renting the property is to generate a healthy income for you.
While it can be uncomfortable to have to kick someone out of your rental for non-payment, don’t let the sob stories soften your stance. If your renter is late on rent payment, charge a late fee every time so they can’t claim it is a new normal.
If the renter doesn’t pay, begin the eviction proceedings immediately. If you delay during the eviction process or drag your feet, it extends the timeline the renter is allowed to stay in the property.
#7 – Protect Your Assets
Lastly, you want to protect your assets. To keep it simple, you just need a good Landlord Insurance Policy to protect the property, and an Umbrella Insurance Policy to protect yourself and other assets.
Alternatively, you can also set up an LLC just to hold the property. However, you have to keep the identities separate and take precautions against someone taking actions to pierce the corporate veil, which will remove LLC protection and impose personal liability on you. Additionally, when you take out a loan under your name and quitclaim the property to your LLC, the lender has the right to exercise the Acceleration Clause and demand full repayment of the loan at any time.
Owning a rental property is not a passive income play unless you hand over the entire operations to a management company, who takes a hefty fee (usually 8% to 10% of the gross monthly rent). That can really dig into your profits, and you will still have to be involved and make big decisions. However, rental property can be a great way to build up a monthly income and home equity, and as a bonus, your property will most likely appreciate in value over the years.
Pinyo is a full-service Realtor with Berkshire Hathaway HomeServices PenFed Realty and an insurance agent with McEvoy Insurance & Financial Services. He specializes in representing clients in the purchase and sale of residential and investment properties throughout Virginia and Maryland areas around DC.