How to invest in rental real estate

How to invest in rental real estate

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Many factors influence whether a property is a good investment, including the location, sales price and profit expectations. For a first-time buyer interested in acquiring rental properties, the key to successful investment is becoming educated about the real estate market in general and the specific properties of interest. When budgeting for the purchase of an income property, take into consideration additional costs such as maintenance of common areas and general wear and tear.

Assess financial and professional resources. Take a realistic look at your finances to determine precisely how much money you can afford to invest in an income property. If taking out loans is a possibility, consider interest rates. As far as professional resources, gather people who are experts in relevant real estate industries such as sales and contracting.

Document the address and sales price of income properties in your price range. Peruse websites that contain local real estate listings, obtain more comprehensive lists from real estate professionals if desired, and look at the list of properties available at local municipal auctions. For future reference, write down the addresses and sale prices of affordable properties.

Research rental rates of comparable homes. U.S. Rental Listings, a real estate site for sellers and renters, suggests finding the rental rates of comparable homes by conducting a search on an online rental property website. Once you have found the asking rent for comparable properties, call the owner or management company and ask about the property. Inquire about amenities to see how much one could expect to get for that rental rate. Ask how long the home has been available to get a sense of whether the asking rent is reasonable and in line with market expectations.

Tour the inside of potential properties. Assess the condition of the floors, appliances, walls and other features that are most prone to wear and tear. Plumbing Maintenance Tips, a home repair site, notes that wet spots on the floor and walls, and the appearance of mold are all signs of plumbing problems.

Estimate the cost of necessary upgrades and repairs. If possible, hire a licensed home inspector to examine all the potential investment properties. Talk to other contracting professionals, who can give estimates on necessary repairs. All Bay Home Inspection Inc, a home inspection company in California, suggests that property owners get three signed estimates form licensed contractors before committing to any work.

Make an offer on properties that fit your budget and real estate goals. Through your real estate agent or at an auction, make offers on affordable properties.

How to invest in rental real estate

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The key to mastering the Internal Revenue Service’s (IRS) Schedule E for landlords—”Supplemental Income and Loss”—is to organize your income and expenses using a spreadsheet or personal finance software program. Landlords who keep detailed summaries of their rental property expenses are the ones who benefit the most at tax time. IRS rules regarding rental income are pretty generous so you’ll want to take advantage of them.

Schedule E Tax Tips

Landlords must keep excellent records regarding cost basis, income, and expenses. The best way to track these items is to create a spreadsheet—your tax accountant may even have a template you can use. Here are the items you’ll want to track:

  • Purchase price of the house, condo, or apartment building you are renting out
  • Accumulated depreciation, and current annual depreciation on your property
  • Rental income
  • Security deposits you received

In addition to tracking income, you’ll want to track expenses. Many expenses related to maintaining a rental property can be deducted from your rental income. These expenses include:

  • Commissions or property management fees
  • Advertising costs
  • Cleaning, maintenance, and repair costs
  • Homeowners insurance and HOA dues
  • Real estate taxes and mortgage interest expenses
  • Utilities

If you track these expenses using personal finance software or a computer spreadsheet, your monthly and year-end reports will be right at your fingertips and you can easily print them.

Take Advantage of Passive Activity Loss Limitations

If one of your rental properties has a net loss for the year, that loss can be netted against the losses and profits of all your other rental properties.

Now here’s the maybe-not-so-good news: If the total for all your properties is negative—a net loss—that loss cannot usually be deducted from the rest of your annual income (but there are exceptions).   That’s because renting out real estate property is generally considered a passive activity, even if you devote a substantial amount of time to selecting the right tenants, repairing the rental unit, and inspecting the property for routine maintenance. Losses from passive activities are limited to offsetting passive profits.

If you actively participate in the rental activities, any rental losses can potentially be deducted up to $25,000 per year in aggregate across all your rental properties. Married persons who file separately have a rental loss limit of up to $12,500 provided the person lived apart from their spouse at all times during the tax year. The amount of the rental loss allowed for active participants in a rental property varies based on your modified adjusted gross income (MAGI):

  • For MAGI of $100,000 or less ($50,000 or less if married filing separately), rental losses can be deducted in full, up to the $25,000 limit ($12,500 for those married and filing separately).  
  • For MAGI between $100,000 and $150,000 (between $50,000 and $75,000 if married filing separately), rental losses can be deducted up to a limit of 50% of the difference between $150,000 ($75,000 if married filing separately) and MAGI.
  • For MAGI over $150,000 ($75,000 if married filing separately), none of the rental losses can be deducted against other income.

You Can Carry Losses Forward

Rental losses that are limited by the passive activity loss limitations can be carried forward to the subsequent tax year when they can offset rental profits.   The passive activity loss limitations are applied each year, but rental losses continue to carry forward year after year until the losses are either used up by offsetting rental profits or by being deducted against other income.

Form 8582 is used to calculate passive activity loss limitations and to keep track of rental losses that accumulate each year for each property.

Tax Planning for Landlords

Landlords can profit when the rental income is sufficient to pay the mortgage as well as property taxes, insurance, and repairs. However, landlords get to depreciate the purchase price of the rental property, and this can often turn an economic profit into a tax loss—expenses may exceed income after depreciation is taken into consideration.  

Every so often, however, landlords face major expenses, such as replacing a roof or gutting an apartment after a long-term tenant vacates. In these circumstances, the landlord may have a loss greater than $25,000, but the passive activity loss rules limit the loss to exactly $25,000. The remainder will be carried over to next year. At that point, the landlord will hopefully have more of a profit and will be able to absorb the excess tax losses.

Selling Rental Properties

Selling a house, apartment building, or another rental property is not the same as selling your primary residence. Just as when you’re calculating capital gains, the formula for calculating the gain or loss of rental property involves subtracting your cost basis from your selling price.  

Adjusted Cost Basis for Rental Property

To calculate your cost basis on a rental property, add together the following amounts:

  • Purchase price
  • Purchase costs (title and escrow fees, real estate agent commissions, etc.)
  • Improvements (replacing the roof, new furnace, etc.)
  • Selling costs (title and escrow fees, real estate agent commissions, etc.)
  • Accumulated depreciation (as reported on your tax forms)

Once you know your cost basis, you can subtract that from your selling price. If the resulting number is positive, you made a profit when you sold your rental property. If the resulting number is negative, you incurred a loss. Gains on rental property sales can be taxed partly as depreciation recapture (at a maximum 25% tax rate) and partly as capital gains (which has a tax rate that depends on your overall income bracket). Rental property sales are reported on Form 4797, and any capital gain calculations are reported on Schedule D.

Real Property and Limited Liability

Many landlords consider forming corporations, limited liability companies, or partnerships to own their rental properties. A corporation might be disadvantageous because favorable long-term capital gains rates only apply to taxpayers, not corporations.  

A limited liability company would be able to pass long-term gains through to its members. Since the gains are taxed on the members’ personal tax returns, they’re eligible for the preferred 15% rate on long-term gains. Landlords should discuss this and other legal aspects of forming a company for rental properties with an attorney to understand the legal and financial implications of such a strategy.

How to invest in rental real estate

More and more people are getting started in real estate investing and are looking to rental properties as a way of diversifying their investments and securing cash flow for the future.

Key Takeaways

  • The cap rate can help you compare real estate investment opportunities.
  • The cap rate is calculated by dividing the net operating profit by the purchase price.
  • As a general rule of thumb, investors should ensure that their rental will generate at least 1% of the purchase price in gross monthly rent.

The Benefits of Rental Properties

Rental properties can round out an investment portfolio and create an ongoing income stream. Several major factors have made this a popular investment option:

  • Many people are dissatisfied with the meager returns provided by their savings accounts and investments such as certificates of deposit, causing many people to take a closer look at rental property investing.
  • Several years of record-low interest rates have made people wary of future inflation, which drives them away from the bond market. As an alternative, people invest in physical assets like commodities and real estate, which has the perceived benefit of inflation-protection.
  • Many want to diversify their investments, which means moving away from solely investing in the equities/stock market.

If you want to get into rental property investing, you need to learn how to evaluate whether or not a potential rental property is a good investment. The following two formulas will help.

The Cap Rate

First, calculate the capitalization rate, or “cap” rate, on your intended investment. This is the profit you can make from net income generated by the property, or the rate of return you’d make on a house if you bought it with cash.    

The cap rate is the net income divided by the asset cost. For example:

  • You buy a home for $200,000.
  • It rents for $1,500 per month.
  • Your expenses (taxes, insurance, management, repairs, maintenance) average out to $500 per month. (Remember, this does not include the principal and interest payments on your mortgage, but it does include the escrowed sum for taxes and insurance.)
  • Your property’s net operating income is $1,000 per month, or $12,000 per year.
  • Your cap rate is $12,000 / $200,000 = 0.06, or 6%.

Whether 6% makes a good return on your investment is up to you to decide. If you can find higher-quality tenants in a nicer neighborhood, then 6% could be a great return. If you’re getting 6% for a shaky neighborhood with lots of risks, then this return might not be worthwhile.

The One Percent Rule

This is a general rule of thumb that people use when evaluating a rental property. If the gross monthly rent (before expenses) equals at least 1% of the purchase price, they’ll look further into the investment. If it doesn’t, they’ll skip over it.

For example, a $200,000 house—using this rule of thumb—would need to rent for $2,000 per month. If it doesn’t, then it doesn’t meet the One Percent Rule.

Under this rule, the house brings in gross revenue of 12% of the purchase price each year. After expenses, the property may bring a net revenue of 6% to 8% of the purchase price.

This is generally considered a good return, but, again, it depends on what area of town you’re considering. Nicer neighborhoods tend to have lower rental returns, while shakier neighborhoods tend to have higher returns.

Final Note

Keep in mind that 6% or 8% doesn’t mean as much if that interest is non-compounding. To give your returns the same benefit and the same chance of growth as money in the stock market, you’ll need to reinvest 100% of the proceeds so your returns can compound upon themselves.

If you follow these 5 guidelines to evaluating a rental property, you should be well prepared to navigate a lot of common pitfalls of real estate investing.

How to invest in rental real estate

Ok, so you have made up your mind about investing in a rental property. Investing in real estate generally offers investors a lot of advantages ranging from steady income, help from somebody else to pay down your mortgage debt, the ability to use leverage, as well as attractive appreciation potential.

Real estate can be a good investment if you buy for the long-term. Of course, house flippers and renovators can also make a profit, but the rental business follows other rules than a short-minded speculation focusing on a quick dollar.

If you want to invest in a rental property, especially if you are a first time real estate investor, there are a couple of basic investing principles that should prevent you from jumping into a couple of potentially expensive minefields.

1. Down payment
When you are investing in a rental property, you likely will need to approach a lender who will come up with the majority of the financing. Ultimately, that’s their job: They will provide a loan to you which then will be secured by the house you purchase with the loan proceeds. Professionals also call this process collateralization.

During the financial crisis many lenders offered loans that didn’t require any down payments (we all saw how that turned out). But, the more money you can put down from the get-go, the lower the mortgage payments are going to be.

Generally speaking, if you can part with some cash for a down payment, you could see a lower mortgage rate.

I would always advocate for a down payment in the 20% neighborhood (if not more) as it signals to the lender that you approach your property investment as a serious business and that you are unlikely to walk away from the mortgage.

2. Long-term financing
Some lenders will offer extremely low mortgage rates, so-called teaser rates, which will later significantly adjust. Consequently, your mortgage payments might shoot up to unaffordable levels if you take out such a adjustable rate mortgage (also called ARMs).

ARMs caused a lot of problems during the financial crisis as many home owners couldn’t deal with the ‘reset’ mortgage rate and a wave of foreclosures followed as a result.

When it comes to investing in a rental property, it is always a good idea to take out a mortgage with a long duration. A 30-year fixed-rate mortgage is especially suitable for investors as they will benefit from fixed monthly mortgage payments and have better planning security. Adjustable-rate mortgage will adjust any time interest rates move and are more of a speculative character.

3. Know your numbers
When you buy a rental property you should have a rough estimate as to what the property’s income is. If it is an unoccupied property, talk to neighbors or real estate agents to find out.

Understand that you will incur maintenance expenses, which will depend on the size and the location of your property and which will affect your return on investment.

Once you have a solid grip on the expected rental income and property related expenses (maintenance, insurance, taxes), make sure that the net amount covers your mortgage payments.

Even though you might calculate a low initial return on investment, understand that real estate really is a long-term investment. Owning a debt-free rental property when you retire and being able to access steady income that supplements other investments is a great way of preparing for retirement.

4. Location
Obviously, if you buy a rental property, the asset must be attractive to prospective renters. Neighborhoods that are clean and safe are always a good bet for a rental property.

The same goes for properties that are located in centers of economic activity and provide access to critical infrastructure such as shopping centers, schools, hospitals and entertainment venues.

5. Screen your tenant
This is probably one of the most important pieces of advice there is. In order to avoid some serious trouble with your new tenants, run a couple of background checks.

Get a few references and talk with prior landlords to see if your applicant is as creditworthy as he or she claims to be. There is nothing worse than putting a tenant into your new property who will then not make his contractual payments.

The Foolish bottom line
If you follow these fairly conservative guidelines when it comes to investing in a rental property, you will have already mitigated a lot of risk that naturally comes with such an endeavor.

If you conservatively finance your investment project, rely on long-term financing and do your due diligence in terms of local market economics and the backgrounds of your prospective tenants, you will be well prepared for whatever is coming your way.

How to Analyze Your Rental Property Investment Options

How to invest in rental real estate

There are hundreds of thousands of people working in real estate every year, meaning those working with rental properties need to find good investments. But it’s not just about finding properties but analyzing their worth.

But how do you analyze your rental property investment? What metrics should you keep track of to know if you’re on the right track?

That’s what we’re here to look at today. Read on to find out more about rental property management and how you can analyze your property investment options.

How Can Properties Make You Money?

Let’s start with the basics. To understand how to analyze your investments you need to know how any property you invest in can make money at all.

This comes in two ways: cash flow and equity. As the value of your properties increases, your equity rises.

The low-hanging fruit between the two is the cash flow, which makes you money in the relatively short term. However, keeping an eye on your equity is also crucial to analyze your long-term success.

Just keep in mind that your cash flow is the differentiator between making one investment better than the other.

Analyzing Cash Flow

Now that we’re on the topic, let’s look at how you can analyze cash flow. Doing so is a crucial part of your overall analysis.

Calculating your cash flow can be complicated in and of itself. As such, here are a few key factors to account for:

  • The utilities you pay on behalf of the tenant
  • Homeowner’s association fees
  • Expenses like lawn maintenance or anything else that doesn’t go under utilities
  • Maintenance for any issues your property experiences
  • Vacancy for when you don’t have a tenant lined up

Once you take account of all of these costs, you can subtract them from your monthly rent to get a ballpark figure of your monthly cash flow. Keep in mind that these costs can vary from month to month.

Other Key Analysis Metrics

There are also other metrics you should keep an eye on when analyzing your rental property investment. For example, property taxes can be crucial.

Some jurisdictions levy higher taxes for those investing in real estate property. This could seriously affect your monthly cash flow or even long-term financial goals.

Another key analysis metric is cash-on-cash return. You can find this by dividing your monthly cash flow by the amount of money you invested in the property.

Cash-on-cash return is a great metric for analyzing the difference between two investments with relatively the same price. Which one will yield a higher percentage of income when compared to the cost?

Cap rates are also good to know if you’re a real estate investor. It’s the annual cash flow of your property divided by acquisition cost.

The higher your cap rate, the better. It’s also a commonly used term in the real estate industry so knowing your cap rates is beneficial when communicating with clients.

Rental Property Investment Analysis for You

Analyzing your rental property investment can be confusing, but not out of your control. Use this guide to help you get a good sense of your investment numbers today!

Looking for property management services in Fort Lauderdale, Florida? Contact us today and we can get you started on a solution right away!

How to invest in rental real estate

You have $15,000 set aside, and you have a few rental properties. Should you aim to pay off a mortgage or invest in a new rental property?

The answer, of course, is it depends. But it’s an easier question to answer than you think.

Here’s what you need to know to decide whether to pay off debt or invest as you start building more passive income and wealth.

Table of Contents

Long-Term Perspective: Changing Goals Over Your Life

The conventional wisdom is simple: invest when you’re young, pay off debts as you near retirement.

There’s more to the question than this, as we’ll get into in more detail later. Still, this general pattern serves as a baseline for the rest of the discussion.

When you’re young, your mission is to build wealth by accumulating assets. And not just any assets, but assets that both generate ongoing income and appreciate over time, such as stocks and real estate.

In the case of rental properties, you can leverage other people’s money to build your portfolio of assets. You have plenty of options at your disposal for rental property loans, from conventional mortgages to portfolio loans and beyond.

As you approach retirement, your goals and priorities shift. Instead of accumulating wealth and assets at the fastest pace possible, you start worrying about things like sequence risk, debt risk, asset management labor, and safe withdrawal rates.

The older you get, the less risk you can tolerate. And debt represents risk in several forms. But when you’re young and your income primarily comes from your job, you can handle far more investment risk.

With me so far? Great, because we’re going to get more nuanced from here.

Interest Rate vs. Expected ROI

One of the core questions when deciding whether to pay off a mortgage or invest your money is which one offers the better return on investment.

Say you have a rental property mortgage at 6% interest. You can effectively earn a 6% return by paying that mortgage off early.

Or you can invest the money instead. Depending on how far back you want to go and which stock index you look at, historically you can expect an average return in the 7-10% range from stocks. With a healthy dose of volatility and risk, of course.

For less volatility and risk, but more labor and knowledge required on your part, you can invest in rental properties. The returns on rentals are far more predictable – you can forecast your exact cash-on-cash ROI and monthly cash flow using a rental property ROI calculator. (For a more detailed comparison, read up on real estate vs. stocks for financial independence and retiring early.)

Let’s say you can earn a 9% cash-on-cash return from a new rental property. Mathematically, you can earn a higher return on your cash by investing in the new property rather than paying off your mortgage early.

But even rental properties come with risk, which is what that math ignores. You can earn a guaranteed 6% return by paying off the mortgage early; the 9% return on the new property is only a potential return.

It’s that element of uncertainty, of risk, that shifts in importance over time. While 25-year-olds can take that risk all day long without thinking twice about it, 70-year-olds dependent on their investment income have a different perspective on risk.

The narrower the gap between the interest rate on your mortgage and your expected cash-on-cash return, the more difficult the decision becomes, and the more you should consider other factors in your decision. Here are some of those other factors to consider, when deciding whether to pay off a mortgage or invest in a rental property.

Why Not Pay Off Mortgage Debt – Reasons to Keep Investing

As outlined above, one reason not to pay off your mortgages is to free up cash for other investments. Investments that may pay you more than your mortgage is costing you.

But that’s not the only reason. Here are a few more reasons why investing in more rental properties, or in stocks or other investments, often makes more sense than paying off your mortgage.

Tax Benefits of Mortgages

I’m the first to argue against buying rental properties with negative cash flow solely for the tax benefits. I believe rental properties should always be cashflow-positive, and that you can’t count on appreciation (even though you’ll probably get it).

That said, rental properties come with a host of tax advantages that investors can take advantage of. One of those rental property tax deductions is, of course, mortgage interest.

Which is not in itself a reason to carry a mortgage. It’s a real expense, not a paper expense. But it can tweak your tax numbers in a couple ways.

First, when you can deduct an expense, it means you effectively get a discount on that expense. If you’re in the 25% tax bracket, then for your deductible expenses you basically get 25% of your money back in the form of taxes you don’t need to pay.

In that case, your 6% interest mortgage is effectively only costing you 4.5%, because you can deduct it from your taxes and avoid 25% income taxes on that money. Suddenly that mortgage interest doesn’t look quite so bad.

Second, deducting mortgage interest can combine with paper expenses like depreciation to show a paper loss for the property on your tax returns. In that case, your rental property can actually reduce your total tax bill by offsetting your other income.

Offsetting your other income is particularly useful for higher-income earners, and can make every real estate-related tax deduction all the more valuable.

How to invest in rental real estate

For investors looking to diversify their portfolio, real estate is a great option. But 89% of Americans have never ventured into that kind of investing, according to RealtyShares, an online real estate investing platform. This is largely because of a lack of funds (61%) or know-how (19%).

But investing sites like RealtyShares and Fundrise mean you don’t need millions or even hundreds of thousands to invest. So do real estate investment funds (REITs) and REIT mutual funds and exchange-traded funds (ETFs). Read on for more about some popular ways to invest in real estate. Of course, the guidance of a financial advisor can also be a huge help.

Invest in REITs

REITs are companies that own commercial property such as office buildings, self-storage facilities, shopping malls and hotels. And just as you can buy shares of a company, you can buy shares of a REIT through an online brokerage. You can also buy shares of a REIT mutual fund or ETF.

REITs tend to pay above-average dividends to their shareholders, which makes investing in REITs particularly attractive. How do they manage this? By law, REITs can avoid double taxation that most corporations face as long as they pay out 90% of their taxable income through dividends to their shareholders each year.

While the IRS generally taxes REIT dividends at your ordinary income tax rate, the Tax Cuts and Jobs Act also initiated a 20% deduction for pass-through income, which includes REIT dividends. In fact, the REIT dividend tax rate of 39.6% dropped to 29.6% for those in the highest tax bracket. Those in the lowest brackets may see even lower rates on the same REIT dividends, thanks to the country’s progressive tax structure.

While there are diversified equity REITs out there, most invest in a single sector. Examples include:

  • Retail – shopping malls, strip malls and freestanding shopping centers
  • Residential – apartments, single-family homes and other dwellings
  • Healthcare– hospitals, medical offices, senior housing centers, etc.
  • Industrial – warehouses, factory sites and other large business structures
  • Hotels – everything from small motels to big-chain luxury hotels

That said, it’s important to to pay attention to sector-specific risk when investing in REITs. Hotels, for example, may not be safe investments during a recession.

In addition, REIT prices tend to sink in high-interest-rate environments. But these may serve as a good long-term investment. And because the IRS generally treats your REIT dividends as ordinary income, they can serve as great retirement investments. In fact, a good portion of REIT shares exist within tax-deferred retirement plans like 401(k)s and individual retirement accounts (IRAs). If you have one of these accounts, you may already be investing in REITs.

Invest in Rental Properties

This is what most people probably think of when they hear real estate investing: buying a residential property and renting it out to tenants. To save money while doing this, you can also take advantage of a process called “house hacking.” This involves getting a residential loan for a property that you live in and rent out. Your tenants become your roommates, and you use their rental payments to make your mortgage payments. Ideally, you’ll also have extra cash left over to save or invest. Your own dwelling becomes your investment property.

The key is to make sure your operating expenses fall below what you collect in rent. Sounds lucrative. Maybe even simple. But you should be aware of the risks of investing in a rental property. You might end up with the tenants from hell. They might cause damage to the property, pay late or not at all. Or they may drive you mad if you live in the property, too. If the situations grows dire, the complex eviction process can stretch out for months.

What’s more, if the thought of getting a call about a broken pipe in the middle of the night makes your head spin, you better have the deep pockets to hire a property manager.

You also have to pay close attention to the rental market. It currently means skyrocketing rent in major cities. But who’s to say it’ll stay that way? Nonetheless, you can open up a major source of passive income if you do your homework and prepare for the risks involved.

Try Online Real Estate Platforms

These days, all you need to get started in real estate investing is an internet connection. You can buy REIT shares, REIT mutual funds and REIT ETFs through an online brokerage. Or you can visit one of several online marketplaces, such as RREAF Holdings and iintoo. These websites list real estate projects that people can invest in.

On the other hand, robo-advisor Fundrise builds portfolios of real estate projects that it offers to investors. These portfolios range from an income focus to a growth appreciation focus. Like all real estate investments, this option is highly illiquid. So if you go this route, you should only use money you won’t need for at least five years.

Traditionally, the world of real estate was closed to small investors. Some platforms still require you to be an accredited investor, which the Securities and Exchange Commission (SEC) defines as someone whose earned income exceeds $200,000 ($300,000 if married filing jointly) in each of the last two years. Others sites, however, don’t have such high barriers.

How to invest in rental real estate

Flip Houses

You’ve definitely heard the term before if you’ve seen HGTV. Flipping houses is basically buying a property for cheap, renovating it and then selling it for a profit.

As with anything that can earn you some serious profits, this practice comes with serious risk. So it’s important to avoid the crucial mistakes first-time home flippers make.

Before you even find a home you want to pump some life into, you need to get acquainted with the housing market. Take a look at what homes in the area are selling for and check out what makes them appealing to homebuyers.

After finding a home you can reasonably bring up in value, you’ll need to estimate the costs of actually renovating the property. If you don’t have all the cash you’ll need, there are several smart ways to finance a house flip, including what’s called a flip loan. These short-term loans tend to carry higher interest rates than conventional mortgages, but the funding can come in as little as a few weeks.

If you’re flipping a home for the first time, you should consider hiring a professional contractor, who can teach you the ropes. An accountant or financial advisor will also come in handy when you’re crunching the numbers for taxes and keeping an eye on what can make the most profits.

The Takeaway

How to invest in rental real estate

Investing in real estate can be a lucrative venture. And you have plenty of options to get started, including investing in REITs, house hacking or trying an online real estate marketplace. All are considered risky, however. So you should only invest money that you don’t need in the near future and make sure you understand all the terms of your investment.

Top 5 Mistakes Made When Investing in Rental Properties

How to invest in rental real estate

There’s no question: rental properties are a booming prospect in Sacramento. After all, over one third of Sacramento’s households are renters. With that market size, it’s clear that you could find a lot of success by investing in rental properties.

But while there are many opportunities for investment, there are many ways it could go wrong. Being an investor means knowing everything from housing laws to the local climate.

Don’t know these ins-and-outs of your rental properties? It could cost you in the thousands.

How do you avoid these costs? Keep reading to learn the five mistakes to avoid when investing in rental properties.

1. Not Enough Research

Research is essential for determining a rental property’s value, marketability, and maintenance needs.

Put yourself in the shoes of a potential tenant. Beyond the rent and property features, what else would you want to know before moving in?

What’s the reputation of the neighborhood? Does it have any unique features? For example, if your property is near a university, you could market to students.

Is there any long-term construction going on nearby? Is the property at risk of flooding or other natural disasters? These factors can affect the value of your real estate.

When determining a fair market rent, it’s best to consult with experts. Property managers can use their knowledge of the local market to optimize your rent.

2. Being Guided By Emotions

When talking to prospective tenants, it’s important to remember that appearances aren’t everything. While some may be friendly, it doesn’t guarantee that they’ve been reliable with rent in the past.

A thorough screening process is essential for making sure you find good tenants. Many property management groups offer these services. The best of these groups will check factors like criminal history and gross income.

3. Ineffective Marketing

It can’t be understated: visuals are the first chopping block for prospective tenants. Are your property photos looking more like a horror movie set than a dream home? Consider the lighting, framing, and even furnishing of your property photos.

93% of all prospective tenants look for housing online. Don’t want to be left with that 7%? Talk with a property management group about how to get on sites like Zillow or Rent.com.

4. Losing Track of Housing Laws

Fair housing laws are always evolving at the federal, state, and local levels. It’s understandably hard to keep track of them: there’s a lot of legal jargon involved in these changes. But not giving them a thorough reading could cost you thousands in fines.

Because there are so many of these laws to keep track of, it’s best not to go it alone. Luckily, property management companies can monitor these laws on your behalf.

5. Cutting Corners on Maintenance

Property maintenance is no light matter and should never be a low priority for investors.

You may think of the “DIY” route as cost-effective, but doing maintenance yourself can take up a lot of your time. Being a rental property investor is already a busy job without making repairs.

Finding a reliable and fair-priced contractor is easier when working with a property management group. This is because they already have a network of long-term relationships with contractors.

Ready to Invest in Rental Properties?

Now that you know these five major mistakes to avoid, you’re ready to embrace real estate. The market is thriving in Sacramento, and with the right guidance, you can make a sizeable profit.

That being said, there are a lot more questions to cover if you want to be an investor in rental properties. How do you coordinate showings? What can you do to make sure that tenants stay for the long-term?

Looking for some answers? Need some insider tips before investing in a Sacramento property? Contact us to learn more!