Have you noticed an uptick in real estate investment recently?
With the expansion and popularity of companies like Airbnb and VRBO, the market for investment properties is experiencing a significant growth rate. This is because the rate of consumers seeking out short-term and easy-to-book rental properties for vacations is gaining momentum.
Therefore, more and more people are diving into the investment world of real estate to capitalize on this tremendous opportunity with renters.
Investing in rental properties is an ideal way to open up cash flow opportunities and experience a return on investment, that is, if you make business-savvy decisions. It is essential to understand the dynamics of rental properties before deciding to be a landlord. You should know why it will work for you, how to buy your first property and whether you should rent out for long term or short term before getting too far in the process.
Why Invest in Rental Property?
Rental properties are a great way to open your doors to new monthly cash flow. If your property is priced right for rent and you purchased it with a good down payment, after expenses you may see some great extra income for your pockets.
Owning rental properties can also have decent tax benefits. There are certain deductions, exemptions, depreciation exemptions, and property real estate tax breaks that help with your monthly cash flow and return on investment. Make sure to speak with your tax professional to make sure you are up to date on the tax aspect of your real estate transaction.
When overall property values appreciate over time, a rental property will go up in value as well. A higher property value benefits you if you decide to sell the property. Also, when property values go up, monthly rent prices can go up, resulting in more cash for your pockets each month.
Tips on Buying Your First Rental Property
After you have made your decision to move forward and purchase your first rental property, there are many aspects you should consider. Buying the property that best suits you is crucial. You need to be sure you are diving into the right decision, all while getting the best deal for your dollar.
We have gathered excellent tips to help you along the way with your first rental property purchase:
Consider Your Options Based on Your Goals
It is essential to determine your goals when considering purchasing your first rental property. There are factors to consider such as price points, maintenance and housing type.
Single Family Homes
Try to keep it simple by purchasing a single-family residence your first time around. Single-family homes are easier to maintain than multi-family properties. In addition, you will have one property and one tenant to manage while you are first dipping your toes in the real estate investment world.
A condominium can be a great option for a first time rental property. Often, condo developments are in great locations near bus lines, restaurants and shopping. Condos can be more cost effective as sales prices generally may be lower than a detached single family residence. With a condo, the homeowner’s association takes care of a lot of the extra maintenance including exterior and lawn. This can save you a lot of time and cost throughout your ownership.
Determining which type of property to purchase is solely based on your goals. Maybe you live close to a condo development or a property in your neighborhood that is a single family neighborhood. Purchasing your first rental near your home can save you a lot of hassles when a visit to the property is needed.
Seek out Advice
There is no harm in seeking out advice from other landlords. Often, specific neighborhoods are attractive rental communities, and seeking out a landlord is pretty straightforward. Ask questions about how they find quality renters, how they manage the property, and what they include in the monthly rent. If you are comfortable with this landlord, ask them if they have benefited from owning rental properties and how they have benefited.
Consult with a Mortgage Professional
Deciding as to whether you will purchase your rental as cash or with a mortgage can be tricky. You should seek out a professional’s advice to see what fits best for you. Cash flow is essential so that you can have money set aside for possible future repairs. A mortgage can be a great way to keep your cash upfront. However, long term outcome is important as well. Will the rent you can charge cover expenses if you have a mortgage?
Add Value to the Cash Flow
If you decide that a mortgage is the best idea for you, be sure to put a significant down payment into the purchase. The more you put down upfront, the more your property will be cash-flow positive. A larger down payment will result in a smaller monthly outflow of cash on a mortgage payment, resulting in a more substantial cash positive flow.
Location, Location, Location
Of course, location is often the key to a successful rental property, whether it be a long term or short term rental. Research the area well. Right questions to ask yourself: is the location experiencing gentrification? Is it experiencing a reasonable rate of growth? Are local amenities growing creating attraction from the surrounding population? A home that is near great schools, shopping, restaurants, and area attractions will help you get a good return on your investment.
Is Short Term of Long Term Rentals Best for You?
Purchasing your first rental property may seem overwhelming, but after you examine your list of pros and cons to being a landlord, finding the property is a pretty smooth process.
However, one of the biggest things to consider: what type of rental property best suits you: long term or short term?
Short Term Pros
Short term rentals are quite popular. The trend towards renting a single-family residence, condo, or townhome while vacationing is on the rise, making this an attractive rental market.
There are a lot of benefits to being a short term rental landlord:
Nightly Rates vs. Long Term Rates
With a short term rental, a nightly rate is typically how the stay is calculated. If you own a rental in the right location that is close to popular destinations such as beaches, mountains, or downtown, you can charge a premium nightly rate. People are willing to spend more money on a vacation rental since it is temporary.
Fewer Repairs and Cleanup
When renters are on vacation, they are less likely to put extreme wear and tear on your property. Typically, the property will need to be cleaned after a short term renter leaves.
Occupy While Not Rented
A benefit of short term rentals is that owners can stay in the property in which they are renting out for a portion of the year. For example, peak season in warmer climates such as Florida is an excellent time to rent your short term rental out, and you can charge peak season rates. When popularity is down, you can stay in the property making good use while the rental season is low.
List on Multiple Sites
The short term rental market for vacationers is trendy. There are numerous sites in which you can list your short term property for rent. These sites make it easy to book tenants, receive payment and display all of your rules, and property-specific instructions all in one place.
Long Term Pros
Long term rentals, or traditional style rentals, create a cushion in which you know your property will be rented out for a significant period. Typically a year lease is the average rental time for one tenant, and then the parties can decide if they will continue on a month-to-month basis or renew the lease.
Lengthy Peace of Mind
When you have a long term rental property, you can project your income. If you have a quality tenant, you can plan on receiving rent for your specified length of time and know you will not have an empty property.
Utilities are Off of Your Shoulders
Long term tenants typically pay all utility bills, except for water and sewer in some areas. This helps with your cash-flow monthly. The less you have to put in, the more you will receive back.
No Extra Furnishing Expense
With a long term rental, there is no need for furnishings for your tenant. The tenants bring their furniture, decor, and living necessities. This saves a lot of cost for you upfront and long term.
When you rent to a long term tenant, you sign a lease. The lease is like a demand for payment each month. You have an agreement, and terms set in place should any issues arise; you have some protection. Also, it is common to charge a security deposit up front to cover any possible damages the tenant may cause to the property.
In the end, there is no right way or wrong way. Someone considering getting into the rental market should carefully examine the pros and cons of short term and long term renting.
Deciding what is best for you will more than likely result in a win-win situation. No matter your final decision, one of the essential factors to pay close attention to: make sure you are buying the right property for your desired outcome!
If you are in the market for an investment property, but you are not sure where to start, real estate professionals at Jensen and Company can help.