How To Start a Successful Rental Property Business
Are you tired of hearing how others have succeeded by investing in real estate? If you’re finally ready to start your real estate rental property business, you have come to the right place. Before getting started, we’ll review a few key things to know, including how to find funding. This article will also cover a few tips on choosing the best real estate assets.
Narrow Down Your Real Estate Investment Options
Investing in real estate can mean many things. It may mean that you invest in real estate investment trusts (REITs) without ever actually owning physical property. It could also mean that you purchase homes needing renovations and then sell them for a property once they’re completed. Still, other real estate investors purchase properties with the intention of renting them to short or long-term tenants.
Consider what type of real estate investment project you’re most comfortable managing at this point in your career. Reviewing your experience and buying budget can be helpful in choosing the most profitable projects. For example, you might start small with a fixer-upper until you can acquire additional funds. Multi-family and commercial properties typically cost more upfront and in maintenance and repairs.
Choose an Ideal Location
Once you have a type of real estate investment in mind, you’ll need to choose a property in the right location. Some cities and states have higher demand than others, and choosing properties in these areas can be a more profitable decision. The real estate investment type that you choose may dictate your location. For example, vacation rental properties tend to do best near popular tourist destinations, such as the beach, parks, or other attractions.
Residential long-term rentals are likely to be more in demand in neighborhoods or suburbs with many families. It can be helpful to review what homes sell for in specific areas and how long they stay on the market before closing to better understand supply and demand. Of course, you could also work with a licensed real estate agent in your area to review housing trends.
Consider Your DIY Skills
A fixer-upper may offer more room for equity but will cost a lot upfront in repairs and renovations. Consider your DIY skill ability to get a better idea of how much you’ll have to pay for repairs. Some home repairs will cost more than others, with foundation, roof, electrical, and plumbing repairs being some of the most expensive. You may be able to complete some minor cosmetic DIY projects to help cut costs.
Research Loan Options
Once you narrow down your real estate investment types and consider your ability to make basic repairs, you’ll need to obtain funding. Conventional or FHA loans that you may have used to purchase your current home may not always be an option for investment properties. It’s also important to note that lenders often consider your debt-to-income (DTI) ratio when determining an applicant’s eligibility. If you already have a mortgage in your name, your DTI ratio may already be too high.
Some lenders offer debt-service coverage ratio (DSCR) loans, which may be more suited to the unique needs of real estate investors. DSCR loan eligibility is based on the projected income of your real estate asset rather than your current income, making them one of the ideal loans for rental properties.
Create an Investment Strategy
When starting any business, it’s always a good idea to create a plan and map out your goals ahead of time. A well-written business plan allows you to visualize your business goals and the steps it takes to reach them.
Acquiring your first real estate asset is just the first step toward creating a successful rental property business. The good news is that once you have proof of a successful rental property, you’ll likely find that more lenders will finance you. Additionally, with multiple properties in your real estate investment portfolio, you’ll build equity even faster. You can eventually turn equity into more funding to acquire additional assets.
Calculating how much you expect to earn with your first rental property and how you’ll allocate the funds can help you create a short and long-term strategy. Determine how long it will take you to repay your loan and at what point you’ll be ready to purchase another. You may find that unexpected barriers occur, such as renovations taking longer than expected or a slowdown in obtaining the necessary building permits, but having a strategy in place is always a good idea.
You don’t need a fortune to start a successful rental property business. With a little strategizing and choosing the right lender, you can begin acquiring rental properties that provide you and your family with passive income.
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