Have you thought about wanting to get into rental property as an investment? You may feel like it is overwhelming. There is a lot to learn, but everyone starts somewhere. In this article, I not only answer the question, “What type of housing should I invest in?” but also give several tips for getting started with rental investments.
How to Start Investing in Real Estate
You do not have to be the most experienced investor to know that this is sound advice. In fact, almost every article or book that I have read, everyone emphasizes the importance of starting small. This has many benefits. It helps to reduce the mistakes that you WILL make. Everyone will make a mistake or two. By following this philosophy, you are able to reduce the negative impact on your wallet. By starting small, you also put your foot in the door and learn what it takes to be a successful rental property owner. This includes mastering the skill set of being a landlord (if you choose to manage your properties yourself) as well as figuring out the tax benefits, among many other things. This advice is also geared to keep you interested in rental properties. If you overwhelm yourself at the beginning, it is unlikely that you will want to continue in it.
Best Advice from Experienced Real Estate Investor
This bit of advice about starting small is not merely an abstract theory applied to rental properties. ‘Small’ also suggests the ideal type of rental property. Two separate authors on Rental Property Investing (Rental Houses for the Successful Small Investor by Suzanne P. Thomas AND The Weekend Millionaire’s Secrets to Investing in Real Estate by Mike Summey and Roger Dawson) prefer single-family homes. Their preference is based off a variety of reasons. The most important is the ease with which you can sell the property. The fact is that there are more people interested in buying single-family homes because you do not just have investors that are looking for them, but also families who want to own their own homes. With the higher number of units (like a multi-family dwelling or a major apartment complex), it is harder to find someone that is going to be willing to purchase the property. This may not be a huge factor if you are planning on keeping your property for a long-term investment, but it is comforting to know that it is easier to sell if some financial difficulty comes up. The smart investor, it seems, not only starts small, but stays small. Some of the other reasons for investing in single-family homes include:
- Renting out what used to be your personal dwelling after moving. Some people buy a house that needs a lot of work to later rent out for a positive cash flow each month. As a result of not being able to afford two mortgages, they will often live in the house while they are fixing it up. Others may want to upgrade their personal dwelling while keeping their old home and using it as a rental. People will often take this approach when the market is bad in order to avoid having to take a loss when they sell their house.
- Less maintenance. Individuals or families that rent single-family homes are often expected to take care of the lawn and sometimes even provide major appliances. This means fewer miscellaneous expenses for the owner.
- Better tenants. While this isn’t always the case, people who rent out single-family homes are generally more responsible. This means that they are more likely to respect the house as their own, but also pay rent on time.
- Easier to Manage. It is much easier to take care of a couple of single-family homes than a major apartment complex. In fact, some state laws require properties with a certain number of units to have a property manager, which means another cost that reduces your cash flow.
Exceptions to the Rule
While ‘Start Small, Stay Small’ may be a good rule of thumb, it is just that. There are always exceptions to a rule. Truth be told, single-family homes in certain markets are not always going to be profitable. One example of this is the market that I live in. The homes are built much earlier than areas with new development which means higher costs for maintenance. They are also more expensive because of the proximity to major cities, and have extremely high property taxes. The combination of these three things makes it unlikely to find a single-family home that is profitable. The people who can afford to pay the high rent that would be required to make a profit are also the same ones that can afford to buy a home of their own. Rental property investments is never an exact science and it does take time to learn the market, but it is easy enough to make a small profit and build wealth over time. It can even make a nice retirement income.