The 5-Step Guide To Rental Investing
Real estate investing is actually an investing method that covers a huge variety of strategies and products. Ranging from buying Real Estate Investment Trusts (REITs), to a more direct approach of trading the properties directly. Rental properties are hands down one of the best ways to generate some side income.
However, there have also been many misconceptions about how risky real estates are and how people make money with it. In fact, it can be among one of the most time-consuming investing methods that also requires you to actively manage it.
Professional real-estate investors already know what to do and how to do them efficiently. So if you’re a beginner trying to get into this lucrative industry, we are giving you five tips to better manage and get started with rental investing.
1. Identify your financial stage
Understand that real estate investing is simply a vehicle to get to your financial goals. Ideally, financial independence. The big question, however, is where do you start? Are you at the absolute bottom where you have to get out of debt first? Did you recently inherit a huge pile of money and are looking for a place to park it?
This mountain to financial freedom actually determines what kind of strategy will fit your situation best. Because the truth is not all strategies can work for all situations and it needs discretionary tweaks to maximise the returns. So be honest with yourself.
Related: 5 Stages Of Financial Independence
2. Choosing a specific strategy
After identifying what your circumstance is, and more importantly, how much risk you can take, your job switches into a researcher. We’ve established that we want to climb the mountain to financial freedom, now let’s ask how.
Climb the mountain to financial freedom.
To determine whether a rental property is worth investing in, you need to first come up with a rough estimate of how much ROI that it’s likely to generate. Factor in the expenses such as capital gains taxes and all the other fees along the way. They can add up to quite an amount.
Start with only one strategy that fits best after all your research. However, that doesn’t mean that there won’t be detours where you have to mix it up with a different strategy or take a completely different route. Most real estate investing strategies work well over the long term, so don’t give up too soon but remember to be flexible as well.
3. Picking the right market
Picking the right market is certainly one of the most important factors that can affect the outcome. For a beginner, it is always recommended to get somewhere close that you can travel to without much hassle. The reason being that if anything goes wrong, you can just head over and settle it immediately.
Regardless of whether or not you decide to invest locally or from a distance, here are a few key factors that can help guide you.
- Employment rates
- Population growth
- Rent to price ratio
- Nearest public transport
- The supply and demand of properties
- Safety and crime rates
- Facilities nearby
- Entertainment within walking distance
Take your time when choosing a target market because getting it right will make your life so much easier while getting it wrong can mean that you’ll be spending a lot of time mending issues.
At this point, you should have a very clear picture of what you’re looking for in an investment property. One of the most viable ways to go about this is to use what is called the 1% rule.
Grab the estimate of your monthly income on this rental property and divide it by the purchase price. The 1% rule comes in as it states that if this number falls in the 1% range, then it is considered a good rental property. Bear in mind that this rule is a simplified rule in terms that it doesn’t take into account the opportunity cost.
On the other hand, just like other factors, your list of criteria will change over time and needs to be custom fitted. Therefore, keep it simple and easy to understand.
Your network is going to be your support group throughout your journey as a real estate investor. You don’t need employees per se, but you do need a few contractors and some professionals who can give you guidance on what to do next.
Your team may consist of your business partners, your mentors, your spouse, a property manager, an accountant, an attorney, and all the people who will help you fix the property when anything goes south.
With so many things to consider and so much information to digest, it can get overwhelming for beginners to get started. Take it one step at a time and we’ll warrant that you’ll figure it out along the way. All you have to do is take the first step and the next will show itself to you.
Although we’ve listed down these tips, real-life can be different. So the key is really to be street smart, flexible, and determined enough to push through the challenges. If anything goes wrong, approach a professional in the industry and ask for their help.
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