Starting a business isn't easy. From choosing the right mattress for your rental property to preparing a business strategy, it requires dedication, hard work and strategic planning to succeed. This is especially true in the rental property management business. Owning a rental property is akin to tightrope walking. It's your job to keep yourself balanced and not fall off when a gust of wind blows.
When done right, rental properties can be a fantastic way to build equity, create a passive income, and leave a legacy for your children. Many real estate investors will buy a house for cash to renovate it and turn it into an income-producing rental in a month.
As Antoine de Saint-Exupéry once said, "A goal without a plan is just a wish." Consequently, the best plans have developed a reputation for helping people in every industry realize their own goals, no matter how lofty they may be. There literally isn't a single professional who couldn't benefit more from a well-crafted strategy, and real estate investors are no exception.
Buy-and-hold investors, in particular, stand to better their long-term outlook when they take a moment to establish a sound rental property business plan.
A proven rental property business plan can help layout the systems, and benchmarks investors need to realize success at a higher level. That said, only one question remains: what does a rental property business plan look like?
If you are interested in starting a rental property business, there are several valuable lessons to take away from experience. Meanwhile, here's a guide for developing a bullet-proof rental property business plan; it may be just what you have been waiting for.
Starting a rental business can be one of the wisest decisions you can ever take in your lifetime. The rental business has an advantage and the potential to make you live the life of your dreams. After you start a rental company, you need not wait for the rest of your life to acquire financial independence in your life.
With a property rental business, financial independence can be achieved early, and then you can easily enjoy a true passive lifestyle. Start with a rental business today to create considerable equity and a kingdom of cash flowing properties that you can pass to many of your coming generations. So if you are keen to start your property rental business, you must read this article.
Thinking about purchasing an investment property? Real estate has produced many of the world's wealthiest people, so there are plenty of reasons to believe that it is a sound investment. Experts agree, however, that as with any investment, it's better to be well-versed before diving in with hundreds of thousands of dollars. Here are the things you should consider and investigate.
If you're new to real estate investing, then you must be wondering how to start a rental property business. When you first start in real estate investing, most experts will recommend starting with a rental property. Rental properties are the most common entry-level investment in real estate for beginner real estate investors. Not only that, but they can also generate some of the highest returns in the real estate business, and they have several other benefits associated with them, such as rental income (which acts as a secondary or a primary source of payment).
So, if you're interested in investing in rental properties, then you must be wondering how to start a rental property business.
Ever considered becoming a landlord? While being a landlord isn't for everybody, it can be a smart way to grow your wealth. See below for our guide to becoming a landlord in 7 steps.
That's because the demand for rental units continues to be strong — driven by the failure of wages to keep up with the rising cost of housing.
The number of renters had risen steadily since 2007, when the housing market collapsed, while the number of homeowners has fallen.
Meanwhile, although home prices have rebounded , they're only expected to climb about 3% this year. By shopping carefully, the overall picture remains favourable for investing in rental real estate.
"You can still buy a rental property and make income on it," says Gary Roberts, a vice president with Long Realty in Tucson, Arizona, who also owns several rentals.
It should not, however, be mistaken for a way to get rich quick. This is a long-term investment that needs to be approached carefully.
Investing in real estate and starting a rental property business attracts people looking for long-term equity in real estate with someone else paying the mortgage. Owning a property is the first step to being a rental property business owner. As attractive as this business is, the amount of money needed, the potential liabilities and the legal responsibilities are often overwhelming. Structure your early deals in a way to mitigate risk while getting more experience.
How To Start A Rental Property Business
Learning how to start a rental property business isn't all that different from just about every other entrepreneurial endeavour. Investors need to identify several key elements before getting started; that way, they can start their business on a solid foundation. Here are some of the most important steps to consider when drafting a rental property business plan and becoming a real estate entrepreneur:
- Join a local REI club and start networking
- Pick a niche and choose your rental property market
- Figure out the proper financing and secure it
- Conduct the appropriate research and hire a manager
- Implement systems to improve efficiency
- Manage the properties and scale the business at a sustainable pace
You Need To Do Your Homework.
It pays to do your homework before you start. Most real estate investment mistakes come from a lack of research. This single boring step is what usually determines if someone will end up a successful investor or a stressed-out landlord. For example, you will most likely need to spruce up the place before putting it on the market to rent. It takes knowledge to do a proper renovation. Check out this Home Remodeling & Renovation Guide for useful information. Make sure the property is in tip-top condition before meeting with potential tenants.
Do a Research
With a rental property business, you are putting a lot of your investment into the play. It then becomes important you first understand the basics of the rental business and the laws surrounding it. You should have a clear idea of where you are putting your money into.
Do calculations and try to estimate whether this business can give the returns you are expecting from your investment. Understand how much work and time you need to put into this business. And, whether the time and efforts you will spend will be worth the returns? Or, do you have any better plan than this?
Before starting the property rental business, you must clear your mind. Try to understand whether you have what it takes to be a landlord? Get yourself all the answers to the above questions before you enter into the rental business. You should take some time in research and avoid falling to the common pitfalls before investing your hard-earned money somewhere.
Whenever you start any business from the ground, you are required to make continuous efforts to make it profitable. The rental business is no different and taking it to where it becomes a profit-generating machine requires perseverance and a proper business plan. This business is not meant for hobby entrepreneurs and weak, heartened people.
Searching for Properties
Finding the right investment property to purchase and turn into a rental property is the most crucial and the trickiest stage of investing in rental properties.
To find the right property for you, you will need to research the different markets (cities and neighbourhoods) to find a market that is within your price range or budget, and where rental properties perform well and have a good rental rate.
This also requires a lot of research and time commitment. However, there are numerous online platforms, such as Mashvisor, which can allow you to find the right market for you with ease, and which will provide you with sufficient data on each market or property to help you identify the most suitable options for your investment.
Choosing the right property will also rely heavily on the investment strategy that you selected, the type of financing that you're using, and your overall knowledge of the market and how to read it. So, make sure to tread carefully and to make up your mind on each step to choose the right property for investing.
After having the research and the expectations in the place, you need to get into the market and find an investment property. Finding the right investment property is the most important factor for carrying out a profitable rental business. A good location and the right property can do wonders in your landlord career. So what is that you should understand about the property and the location you are investing in?
The first and foremost step here is to find a location where you want to start your rental business. The most preferred location for someone who is just starting up is always the one that is near and accessible easily. A location far away from your current residence can cause unnecessary trouble. Though, having a location that is in a close radius of about one hour drive from your current residence is still a safe bet.
Once the location is decided, you need to determine your budget for investing in property. Check whether you can find a good property in your budget in this area or not. If yes, go on hunting the good deals in this area. Remember, never hurry to close a deal.
Spend a month at least on investigating the deals before you actually buy your first rental property. Look at no less than 50 investment properties in this one month. Doing so, you can have a lot of potential options before you put your investment into it.
Don't invest somewhere you don't know.
An old joke is that the three keys to a successful business are "location, location, location."
That's especially true for rental property.
A home that seems to be a steal might be priced lower because it's in a neighbourhood most people wouldn't want to live in — with higher crime or poor schools, for example.
For that reason, investing in out-of-state property is a gamble. Buying in neighbourhoods, you know well or have carefully researched is the smart move.
Pick a Niche
After doing your research, your next step would be to pick a target niche.
When learning how to start a rental property business, you've already made a choice when it comes to the investment strategy that you want to use—however, and there are different types of rental properties and different strategies for investing in them.
When learning about the different types of rental properties, you will come across two main types that are very common:
- Long-term (traditional) rental properties
- Short-term (Airbnb) rental properties
Each of these types has its own unique advantages and disadvantages, as they function very differently from one another.
Short-term rentals, in particular, require more research for investing in them due to the complicated laws and rules surrounding them, and how these laws differ from one location to another.
Additionally, there are multiple strategies that you can use for investing in rental properties. For example, you can start a rental property business using your own home or primary residence by renting out a room or a section of your house.
You can also invest in rental properties abroad and rely on professional property management companies to run and manage the properties for you.
Learning as much as you can about these different aspects will help you determine which one you want to focus on, and this type of property or strategy will become your niche.
Figure Out The Right Rent.
Rents differ widely around Australia. Craigslist and local real estate agents can give you an idea of what they are where you're buying. Then you need to determine if that rent will be enough to cover your costs.
Too often, people take a look at their loan and think if they cover that, they're doing fine. But you'll need to pay property taxes and insurance.
Roberts also assigns 5% of gross rental income to regular maintenance and another 5% to pay for the downtime and repairs that come with vacancies.
Not budgeting enough for maintenance is a common mistake. Things break. You're going to need money in a bank account to deal with those expenses.
Professional organizations such as the Institute of Real Estate Management have more information on the income and expenses that come with different kinds of property.
You'll also want to know the rate of return you're getting on your investment. There are formulas, such as the "capitalization rate," to help with this, but you might want to turn to a professional. A good accountant can make sure the purchase makes sense.
Register Your Rental Property Business
Registering your business is the first step to formalizing it. Registering your business basically means you're listing it with the right local, state and federal agencies to gain official business status.
The corporate affairs offices or the chamber of commerce office is where you can get the ball rolling for your small business's registration. Defining the type of business is important. Is it a partnership, a small business, or a sole proprietorship?
Figure Out Financing
Securing financing is probably the biggest hurdle rental property investors face. However, financing a real estate deal isn't nearly as hard as many new investors make it out to be. As it turns out, there are countless lenders just waiting for an opportunity to give a savvy investor the money they need to invest in real estate. Outside of traditional sources, like institutionalized banks, today's real estate investors have access to more funding sources than ever before. Private money lenders and hard money lenders, in particular, have become synonymous with the best ways to secure funding, and are as willing to work with investors as investors are eager to work with lenders.
These "alternative" sources tend to coincide with higher interest payments (often three to four times higher than traditional banks), but the added cost is well worth it. In exchange for their higher rates, investors not only receive the money they need to complete a deal, but they also receive it a lot faster than they would if they went through a bank. Whereas banks can take upwards fo a few months to distribute funds, alternative lenders can have the money in investors' hands in as little as a few days—if not hours.
It is also important to note that securing financing should be done before even looking for a home. That way, the investor will know exactly how much home they can afford, and which investments are worth pursuing further.
What are the costs involved in opening a home rental business?
Financing for investment properties is very different from securing a personal home loan. Rules change periodically, so make sure you understand the down payment required prior to making any major decisions. Under today's financing, investors who own more than four rental properties are expected to put down 25%. 20% down is required for entrepreneurs who own less than four. If you have enough cash flow to pay for your investment in full, consider this decision carefully. Many investors recommend using this capital to purchase multiple properties. This should increase both your monthly income and long-term equity.
Each rental property should have adequate insurance to protect both the property and your liability. A portion of your budget should also be set aside to make any necessary improvements and to maintain the property.
What are the ongoing expenses for a home rental business?
There are a number of expenses associated with a home rental business. Seek guidance from other professionals in the community or organizations such as the Institute of Real Estate Management when setting a budget and rental rates.
- Standard expenses include:
- Property taxes
- Loan interest
- Some landlords absorb the cost of lawn maintenance, while others require their tenants to cover these costs.
Beware of High-Interest Rates
The cost of borrowing money might be relatively cheap in 2020, but the interest rate on an investment property is generally higher than a traditional mortgage interest rate. If you do decide to finance your purchase, you need a low mortgage payment that won't eat into your monthly profits too much.
Calculate Your Margins
Wall Street firms that buy distressed properties aim for returns of 5% to 7% because, among other expenses, they need to pay staff. Individuals should set a goal of a 10% return. Estimate maintenance costs at 1% of the property value annually. Other prices include homeowners' insurance, possible homeowners' association fees, property taxes, monthly expenses such as pest control, and landscaping, along with regular maintenance expenses for repairs.
Join a Real Estate Investment Club
Just about every city has at least one real estate investment club. Join and meet people who are already running successful rental businesses. You might be able to partner with some splitting costs and risks. Either way, you will gain valuable knowledge and learn from others' experiences by being part of the club. Most clubs also network property listings and have investor members seeking project partners.
Get Professional Help When You Need It.
If you decide to manage your property, you'll probably want to consult a real estate lawyer to get a solid lease and learn the rights of tenants. You may wish to hire an accountant, and you'll need to know some good plumbers, electricians and other tradespeople.
Turning to a property management company is another approach, although it will take a bite out of your earnings.
"Once I had more than two or three addresses, it made sense for me to hire a property manager, just because my wife and I also have careers," Roberts says. "It's worth it for us to pay 7% to 10% of our rental income to a manager."
It's important to get references and check properties when choosing a management company. But even with a good firm, Roberts notes, the final responsibility for taking care of a rental is the owners.
"You're going to want to inspect the property regularly, he says. "You want the property manager to take those late-night calls, but you want to keep a good eye on things."
Cash Flow and Analytics
While this step is the last one before you start your rental property business, it is also relevant in the previous step (searching for the property). Understanding the different metrics and methods of calculating the rate of return on a rental property is very important when trying to find the right property as well as once you've found it.
First of all, the most important thing to look at when it comes to rental properties is the property's cash flow. A property's cash flow is the amount of rental income that is left over after you've paid off all expenses on the property.
This cash flow can be either positive or negative. Positive cash flow is good, and it means that your property is profitable. A negative cash flow, however, is what you need to watch out for. If a property has a negative cash flow, it means that it costs you more money than it is earning.
In addition to the cash flow, you should also learn about and use metrics such as cap rate and cash on cash return, which can help you estimate the rate of return that your property will have.
These metrics can also be used during your search for the property as they will allow you to identify the properties that are expected to have the highest returns.
Get Business Insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company's financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you're unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it's a great place to start for your business.
Another notable insurance policy that many businesses need is Workers' Compensation Insurance. If your business will have employees, it's a good chance that your state will require you to carry Workers' Compensation Coverage.