Building a rental property isn't as difficult as it sounds, with many benefits for investors and tenants alike.
If you're interested in growing your investment portfolio, venturing into real estate can be a great way to diversify your assets. Whether you're investing for cash flow, appreciation, or a combination of the two, rental properties can provide life-long residual and passive income. While apartment buildings, vacation homes, and other types of rentals have the potential for a significant return on investment, owning property is a serious financial undertaking that will require time and dedication. Before committing to any significant investment, you must research, understand the market, and learn the risks involved. Here's a look into what investing in real estate entails and some tips for maximizing your investments.
Grow Your Investment Portfolio
Although there's a risk with any type of investment, rental property is one of the most stable assets you can have in your portfolio. If you've considered entering the world of real estate investment, you've probably wondered what it's like being a landlord. With the number of renter households growing in the US and rental companies like Airbnb dominating the vacation industry, landlords are at an advantage in today's market. When becoming a landlord, there's a lot to learn, but the long-term investment potential makes it worth it.
One of the major benefits of acting as a landlord is making your own rules and decisions. You can choose the type of property you want and its location, the tenants you rent to, down to the details of the lease agreement. With so much freedom over the direction of your investments, you'll have to be sure that the decisions you're making are educated. It's important to note that you have specific responsibilities as a landlord and must follow local laws and HOA guidelines. Ultimately, you can scale your real estate portfolio and run your business however you see fit, but be aware that your decisions impact your success as an investor.
Along with the possibility of life-long residual and passive income, there are other financial benefits to investing in real estate that come in the form of tax perks. Aside from the mortgage payment, rental business expenses can be tax deductible. Rental properties also aren't subject to self-employment tax unless you've formed a corporation. As a landlord, you'll benefit from any depreciation that happens to your property in the form of wear and tear through tax deductions while profiting from the general appreciation of the property's value over time. In the future, if you decide to sell your property, you'll have to pay tax on the appreciation. Fortunately, since you can easily diversify your real estate investments, you can buy properties in locations that sell for decent profit to balance out costs and risks.
Choose Where to Invest
When investing in real estate, location is perhaps the most significant factor in determining availability, affordability, and demand for housing. Before you choose what specific property you want, you'll need to find locations where the market is prime for profit. For example, investing in a city with a growing population and a revitalization plan would be wise. To maximize your investment, you'll need to know what factors are essential when choosing the perfect location for your rental property.
One of the first things to consider when choosing a location for your rental property is the neighborhood demographics. An area's demographics can significantly impact rent growth and demand. It can also determine who applies for rent and perhaps even how the property is treated in the hands of tenants or guests. For example, if you choose to invest in a property near a university, you might find that many of your renters are young. You may deal with parties and property damage during the school year and vacancies in the summer and winter months between semesters. Find out who your ideal customers are, and choose a location that fits that demographic.
Once you have a demographic in mind, you'll need to find out what's important to renters in your target market. People tend to like having a variety of amenities such as shops, bars, restaurants, and parks nearby. The crime rate and access to public transportation or ride-hailing services will also play a role in the demand for rentals in a specific area. You'll be more likely to find renters if your property is close to local amenities or at least safely and easily accessible. Finding an empty lot in popular destinations may be difficult, especially if they're close to urban centers. Therefore, after choosing the perfect location for your rental, you'll have to decide whether to build a new property or buy an existing one.
Choose to Build or Buy Property
Once you've chosen a location for your rental, you'll need to decide whether to build a new property or buy an existing one. Most people would probably prefer a new property but might find themselves settling for existing builds due to the perceived complexity of new construction. At the end of the day, both options have pros and cons, so you must consider each alternative.
The truth is, building a property might not be as complicated as many people think. Lately, sellers have had the upper hand in the housing market. Home inventory is low, prices are high, and buyers find themselves competing with multiple offers. When you build a new property, you don't have to worry about out-bidding other buyers. Although it might cost more, in the beginning, to build new, you could save a lot of money in the long run. Many new homes are built with better technology and are more energy efficient. Not to mention the added benefit of customizing the home to your liking! Subsequently, you'll have lower maintenance and utility costs and no need to budget for renovations. You can expect to wait longer to use your new property because of the time it takes for construction, but if you're not in any hurry, building new could be a great investment opportunity.
Aside from the perceived complexity of builds, one of the main reasons people buy an existing property over building a new one is because there are typically fewer up-front costs involved. Customizing a pre-built property can be done over time, rather than at once like with a new build. Existing properties also benefit buyers on a deadline because of their faster routes to closing. Nonetheless, buying an existing property won't fit everyone well. Often with older properties, there are unexpected costs that arise. The odds of having to make repairs are higher in old homes than in new builds, and chances are you won't know what repairs are essential until the property has been lived in for a bit. Once you've included the costs for renovations, it's difficult to say how much money you'll have actually spent by the time you've made the necessary changes to the property. Updated rentals with many amenities are the highest in demand, so keep this in mind when choosing to build or buy.
Maximize Your Investments
Renters nowadays want their stay to be an experience in and of itself, so you'll need to ensure that your rental property has a lot to offer to remain competitive on the market. Adding value to your property is one of the best ways to boost your bottom line and maximize your investment, and you can do this by building a new property or buying and renovating an existing one.
Although building a new property can be more expensive than buying, starting at the building stage and designing your parcel to be a rental can be advantageous in the long run. Renters favor getting the most out of their money, so you'll want your rental property to maximize occupancy potential to get a large return on investment. Building new allows you to maximize the number of heads in beds while keeping the rest of the build proportional to the number of people it'll host. In other words, there should be a reasonable ratio of bedrooms to bathrooms and an adequate amount of shared space. When it comes to buying a home that's already been built, there are limits as to what you can customize. Although you can make cosmetic changes, sometimes it's challenging to change the overall footprint of a house, and that'll be important to take into consideration.
Furthermore, the use of space and design plays a big role in attracting potential renters. For example, common areas tend to be unique selling points in rentals, and you can design these spaces with your chosen demographic in mind. Extra on-site amenities are top-rated, and building new allows you to map out the lot to add other usable areas such as swimming pools, jacuzzis, and patios. While these changes can be made to existing properties if the design space allows, you'll need to factor in an additional budget for renovations. New builds allow you to optimize what your customers are looking for without the hassle and worry that can be involved with renovating.
Finance Your Business While Operating
Finance planning for your rental property is important. You'll need to know how much it'll cost to build or buy your property and the expenses involved in operating your business. A property that's cash-flow positive should generate enough income to pay for the mortgage payment, as well as the monthly costs of operation. You can expect to pay anywhere between 35-80% of your gross income on operating expenses, and calculating these costs will be important in helping you decide how much you should charge for rent and other amenities your property offers.
If you're planning to build a new property, a construction loan will be required unless you plan to pay with cash. These are short-term loans that are used to finance the cost of land and construction. The initial payment of the construction loan will be used to pay for the lot and begin the foundation, and a series of subsequent payments will cover construction costs as major milestones are completed. Eventually, the loan will convert into a long-term mortgage. Sometimes, investors shy away from new builds since these projects often require a lot of time, money, and effort. Thankfully, Welcome Homes streamlines the building process and offers guaranteed pricing upfront so that investors know what their all-in budget will be.
If a new build isn't possible, or you think that buying an existing property is the best decision for you, there are typically a variety of loan options available. Before you begin with the home-buying process, it's always smart to get a mortgage pre-approval. This process determines how much money you can borrow to buy a property, what your interest rate might be, and which loans you could be approved for. A lender or loan officer will take a comprehensive look at your financial situation to give you a loan estimate, and a process like this is beneficial because you won't be looking at properties out of your budget.
Rental property is one of the most stable assets to have in your investment portfolio, and real estate is easily scalable and diversifiable. While it takes a lot of footwork and research to find your ideal rental property, it's an investment that can be well worth it. If you choose the right location, design your property with your renter in mind, and budget accordingly, you could be on the road to operating a cash-flow-positive business.
More from Real Estate
Where does Westchester county rank among the best places to live in New York? Our Welcome Homes Value Score analysis looks at list prices, housing stock, location, and several other factors to create a single, easy-to-understand rating.
More from Home Buyers
More from Landowners
Where does Greenburgh rank among the best places to live in New York? Our Welcome Homes Value Score analysis looks at list prices, housing stock, location, and several other factors to create a single, easy-to-understand rating.