Residential property prices have skyrocketed in recent years. As property values have gone up, so have rental rates. As a result, now seems to be a good time to begin investing in residential rentals. Building a portfolio of rental properties could pay off in a big way over several years of investing. Still, residential rentals are not a good investment option for everyone.
There is a lot to consider before getting into the rental game. Jumping in without giving things a lot of thought is a good way to get yourself into trouble. More than one residential property investor has lost his shirt because he didn’t take time to think things through.
Here are the most important things to consider before investing in residential rentals:
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A good place to start is determining your rental strategy. Are you looking for long-term tenants willing to sign leases for a year at a time? If so, you will want to look for certain types of properties that long-term tenants are interested in. Along those same lines, are you looking to invest in upscale properties or more affordable homes?
Maybe long-term leases don’t interest you. Instead, you are looking to buy properties that serve the tourism market. Rather than long-term tenants, you’re looking at renters who come in for a week or two at a time. Now you are looking at an entirely different set of properties.
Your Financing Options
Unless you are independently wealthy, you probably don’t have the cash to build a portfolio from scratch. You are going to have to obtain financing from multiple sources. Retail banks and credit unions are one option. Hard money is another, although Salt Lake City’s Actium Partners says that not all hard money lenders want to get involved in residential real estate. You can also look at other private lenders, peer-to-peer lending, and other lesser-known options.
It is not difficult to be your own property manager if you’re only looking at one or two properties. But if you plan to build a sizable portfolio, you are going to need help. Will you hire your own management and maintenance staff, or will you contract with a third-party service provider? This decision is more important than you think because it will directly affect your profit margin.
Your Appetite for Rehab
Hand-in-hand with maintenance and management is property rehab. If you don’t mind investing the time and effort into renovations, you’ll have more opportunities to buy rental properties at lower prices. You will be able to buy distressed properties like repossessions, short sales, auction properties, etc. On the other hand, a low appetite for rehab might limit you to turnkey properties. Prices will be higher and inventory tighter.
Your Long-Term Strategy
Far too many new real estate investors start building a portfolio without thinking about a long-term strategy. This is a mistake for the simple fact that residential rentals take time to start generating significant returns. In the first few years, you are paying back mortgages. Every time a tenant moves out, you are looking at rehab costs.
If you’re not in it for the long haul, you might not realize the profit you were originally thinking. So at the very least, plan to put in 8 to 10 years. Anything less and residential rentals are probably not going to be your cup of tea.
There still is money to be made in residential rentals. If there weren’t, properties would not be snapped up by investors so quickly. The secret to success is thinking things through before you get started, then applying sound investment and property management program strategies.