Investing in rental property offers many strategies for creating short-term and long-term wealth. Investors are focused on immediate cash flow to cover day-to-day expenses. But they must also focus on appreciation, equity, and leverage to grow their investment business for the long term.
Investing in rental property isn't all headaches and backed up toilets when the right strategies, automated systems, and key people are in place. Tenants pay down the mortgage, build equity, and your investment company reaps the tax benefits. Plus, your property will likely appreciate adding more wealth-building potential to the bottom line.
Leverage / mortgageable asset
Equity/ Tenants that pay your mortgage
Between 10 to 12% ROI for top producing and 7% for average. A quick reference when investing in rental property: after all expenses and costs are paid including insurance, mortgage, and taxes you should have a profit of at LEAST $100- $150 per unit per month.
Do the math. It's vital to do your due diligence, run a detailed analysis of the property, determine your projected profits, maximum allowable offer (MAO), and exit strategy.
Low Income. Look for vacant properties on the fringe of blighted areas which need rehab. However, the properties should have sound construction. They'll be priced low & ready to go. Buy them, do a cosmetic rehab and fill the vacancies. When the cash flow and the capitalization rate stabilize, then refinance, pull the equity out and buy another property.
Many low-income properties qualify for section 8 tenants or tax incentive programs that keep money in your pocket. Tax abatements can help with the rehab costs, especially in neighborhoods with historical houses or inner-city areas that have been economically affected.
Pretty properties in good neighborhoods. Find multifamily properties with less than 70% occupancy and high overhead costs. The initial rehab and turnaround time will be less because they are already in good condition.
Plus, they'll bring the highest monthly rental price. To stabilize the cash flow when investing in rental property; increase the occupancy rate and decrease costs.
Single-family homes (SFR) provide the opportunity to grow your portfolio at your own pace and for a large amount of diversification. They are affordable with attractive and convenient financing options. Leveraging the individual properties or selling one SFR does not affect the whole rental portfolio.
SFR remains rented for the long term. It isn't easy to pick up and move a family - on average; a family stays for between 3-4 years. However, these tenants need amenities like yards, garages, laundry rooms, extra bathrooms, and schools and shopping nearby.
Consider the 50% rule. Approximately 50% of the gross rent on a single-family home gets eaten up by expenses: insurance, repairs, taxes, taxes, HOA, and management. However, the mortgage payment is not included in this 50% rule.
Multifamily is like putting all your eggs in one basket. Investors can build a large portfolio almost overnight with multifamily properties, but they offer little diversification, financing requires a commercial loan, and liquidating is slow and time-consuming. However, due to the economy of scale, they show potential for greater cash flow and fewer maintenance costs per unit. Multifamily is perfect for long-term investments.
Airbnb, VRBO, Student and Corporate Housing have created opportunities for short-term tenants. These strategies will again be a lucrative option after the COVID crisis is under control, and people start to vacation again.
Provided that the property is newer construction and in good condition, approximately 1% of the value of the property. 3-5% for older properties in need of an update.
Gain the top of market rent payments. Do not defer maintenance. Invest in your asset, build it up. Create value, turn the property around with cosmetic and safety updates, and decrease insurance premiums. Plus, maintenance costs are an expense to report on your company's taxes.
The 2020 Property Management Industry Report by Buildium and the National Association of Residential Property Managers (NARPM), surveyed both renters and property managers and this is what they found.
Zillow 2020 survey- 69% of tenants said they prefer to continue with no-contact interactions with real-estate professionals and landlords even in the post-pandemic world.
Tenant turnover is expensive. To counter the effect, the most cost-effective move you can make is to keep your current tenants - provided they have been good.
Tenants also want a professional Landlord. It's critical to understand your local rental market, fair housing laws, and landlord responsibilities.
Systematize and optimize, take the hassles out of being a Landlord.
If you decide to be a do-it-yourself landlord, we suggest using property management software. It'll do all the hard work for you, save time, and keep you from making costly mistakes.
The best software is a full-service package that lets you manage with ease from your desktop, Ipad, or mobile device. It needs to be cloud-based so you can access it anywhere there is internet service. And it must take care of every aspect of leasing the property, marketing, and financial reports.
It must have tenant and landlord portals, advertise rentals, schedule showings, accept applications, screen tenants, collect online payments, sign leases remotely, track property maintenance, pay bills, do bookkeeping, easy to use and cost-effective - less than the price of cable.
Professional management. We highly recommend using a Broker, Realtor, or property management company when investing in rental property. The cost is 10%, give or take a little- but remember you get what you pay for, so don't go low cost. It would be best if you had someone who can buy, sell and manage multifamily properties, fill vacancies, increase NOI and help build your wealth with an income-producing portfolio. They will be your professional counsel with insight and guidance, along with a complete understanding of the local real estate market, and state and federal legal regulations, including the ADA act.
When you turn your rental properties over to a professional, the property will generate passive income or semi-passive income. You will have more time to concentrate on other areas of your business.
One last thing about adding a Realtor/Broker to your team to manage your investment properties. They will have clients who are investors, and if your business model also consists of wholesaling properties, then your Realtor/Broker will have instant access to possible buyers for your deals. You will most likely pay a real estate commission, but it is worth it for an effortless sale. Sometimes, it's about being a deal maker, building relationships, earning repeat business, and referred deals.
And this process works both ways- Don't be surprised to find that your Realtor/Broker offers you properties from other investors in their network.
And as tenants want to move on to buying a home, the Realtor/Broker has an established relationship with them and can easily suggest one of your retail properties to them. Provided that your business model also consists of retail sales.
Increase occupancy to 95% (multifamily) and 100% (single-family). Once the rental property is fully functioning and producing cash flow and a profit, it can be quickly sold to an investor as a turn-key business at a maximum price.
Leverage. Use other people's money and always mortgage the property. Keep the property and refinance the mortgage and pull out all the equity so that you can invest in another piece of real estate. Refinancing about every 4 to 5 years. Plus, the loan's interest will be written off on your company's taxes. Also, the loan will add an extra layer of asset protection to the property.
The Tax Benefits of investing in a rental property may not put money directly into your pocket, but it can help keep the IRS from taking it out. If your business corporation is structured correctly, you'll have write-offs of deductible expenses each year. These expenses are related to the rental property's operation plus a depreciation allowance.
Avoid capital gains taxes with a 1031 tax-free exchange or defer taxes by investing through an IRA. Talk to your tax professional for more information.
Investing in rental property is one of the strongest strategies for building a solid foundation for your real estate business.