Rental – What is Rental Property Investing

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What is Rental Property Investing

What is rental property investing? 

Rental property investing is probably the most common investment strategy that people get into. 

It certainly should be the most common that people get into as a long-term wealth-building strategy. And so, what rental property investing is, it’s buying a property, holding that property for as long as you want, usually, until you retire or die. And what you do is you rent that property out during that time. The idea is you make money by renting the property out for more than what your monthly costs are. Costs associated with owning a rental property include things like mortgages, taxes, management, and maintenance. 

The problem with rental properties is people don’t take into account all of the costs, especially things like property management or they underestimate any maintenance costs.

And what happens is people end up having a property that actually costs them money because they go into a negative cash flow. What that means is they aren’t charging enough rent to offset the costs that they’re actually incurring. 

Another thing that you need to make sure that you account for when looking at rental properties is any kind of vacancy and any kind of turnover.

I like to throw in an estimate or percentages on each one of those “other” costs. For example, I use a 5% vacancy rate estimate, a 5% management fee estimate of, and a 5% maintenance fee. 

Your estimates will vary depending on the type of property you are investing in. 

Obviously the older the property, the more maintenance. So maybe you want to put in a 10% maintenance estimate. Now, when you do all your calculations when looking at purchasing a rental property, you’re probably going to run into a situation where you’re not going to be able to find a property that’s going to cash flow in your area, especially if you’re looking at single-family homes.

For example, let’s say you have a single-family home and you can rent it out for $2,000 a month, but your costs are $2,200 a month if you include all those additional costs that I talked about. 

Single-family home rentals are the hardest to cashflow. 

If you are looking at rental properties, I would look at multifamily homes, like maybe a duplex, a triplex, a fourplex, or ideally a five-plex and above. 

The nice thing about investing in a five-plex and above is that those properties are considered commercial. Your ability to finance those properties is a lot different than your ability to finance the other properties because the other properties are considered residential. 

When purchasing residential properties, lenders look at you as an individual borrower as opposed to using the building to qualify for mortgages. 

There’s a lot to learn around how to look at rental properties from a residential perspective rather than from a commercial perspective. That’s a much bigger discussion. 

In general, rental property investing is going out and buying properties and renting them out at a cost higher than what your costs are, so that you actually realize a profit every month. Don’t buy a rental property in anticipation of it appreciating where you can charge higher rents and get your profits in the future. 

You want to start making money with rentals right away. 

Okay, so that’s rental property investing.

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