In the wise words of Robert Kiyosaki, “A wealthy person is simply someone who has learned how to make money when they’re not working.”
More people are starting to see the benefits of earning passive income either as their sole source of income or as a “side hustle.” One popular method of generating passive income is investing in rental properties, AKA “buy-and-hold investing!”
Making money with rental properties can be a tricky yet rewarding endeavor if you play your cards right. Before you purchase anything, you’ll want to make a solid, detailed business plan and perform extensive research to ensure you’re making the most worthwhile investments.
Not sure where to start with your rental property investment strategy? Here are some important factors to consider when choosing a property:
Decide on the Type of Rental: Short-Term or Long-Term
When you buy a rental property, you can either make it a short-term rental or a long-term rental.
Do you want tenants to stay for short periods of time, AKA for vacations? Or, would you like your tenants to stay for a year or more and live in the rental unit? Or, do you want to work with a mixture of both?
Both types of rental properties have their own pros and cons:
Pros of Short-Term Rentals
Since you can charge nightly and set minimums for stays (for example, guests must stay for three nights or one week to book), if your property is fully booked up, you may be able to make more money with a short-term rental than a long-term.
Also, since you’re cleaning the property between guests, you’ll be able to notice issues with the property before they become extreme. Stopping an issue at the source is much easier and more convenient than dealing with an emergency, especially if an emergency happens while guests are occupying the property.
Cons of Short-Term Rentals
While the earning potential can be higher with a short-term rental if you have it booked up, there is no guarantee that you’ll have interested tenants at all times.
Also, the operating costs for a short-term rental are higher than a long-term rental. With a long-term rental, tenants typically bring their own furniture, stock up on their own personal supplies, and take care of the cleaning themselves. With a short-term rental, you have to front the cost of cleaning the unit and supplying household essentials and furniture.
Pros of Long-Term Rentals
If you get tenants who are responsible when it comes to making payments on time, you’ll have consistent, guaranteed income for years at a time.
Knowing exactly how much the property will bring in each month makes it easier to plan for repairs and maintenance. Also, a long-term rental may be easier to finance as it’s often considered a less risky investment with a more stable return.
Cons of Long-Term Rentals
While you have a great deal of flexibility to raise nightly rates for short-term rentals, this same flexibility doesn’t exist with long-term rentals.
The contract you create for your tenants may limit your ability to raise the rent until the lease is up.
Also, when you’re stuck with one tenant until the lease is up, you may end up with an unsatisfactory tenant who pays rent late, damages the property, or calls often about minor inconveniences. Because it can be difficult to get tenants out, these tenants may end up costing you a lot of money with missed rent payments, legal fees, or repairs.
Choose the Type of Property You’d Like to Invest In
Once you’ve decided between short and long-term rentals, you’ll want to think about the type of property you want to invest in.
For example, you could specialize in single-family homes and rent to one group at a time. Or, you can invest in multi-family properties. You can even use vacant land as a short-term campsite or invest in commercial properties!
Tip: Rules and regulations around owning a rental property can vary depending on where you live. We recommend checking with your local county to understand what’s possible in your area.
The type of property that best fits your needs will also depend heavily on your financial situation. If you’re low on funds starting out, a campsite or a small single-family home may be the best option to start with. If you have a larger chunk of money to work with, you may want to dive right into multi-family investments or commercial property.
Additionally, you’ll want to understand any fees associated with a rental property depending on the region you purchase in. For example, HOAs (Home Owner’s Associations) charge a monthly fee for being part of the association. This fee will cut into your monthly profit from the rental, so you may find it best to avoid these property types.
Luckily, PropStream offers 120+ unique search filters and 19 Quick Lists to help you only find properties that match your specific search criteria!
Choose a Region That Will Offer the Most ROI (Return on Investment)
Once you’ve decided on the type of rental you’d like to invest in, you can use this decision to choose a location to invest in.
To get the most return out of your investment, you’ll want to focus on a booming real estate market where people are willing to pay top dollar to live or vacation. To help you narrow down the best areas to invest in, we offer an “Analytics” tab on our platform that helps you uncover Rental Values using these filters:
- Rent Price
- Rent Price/Bedroom
- Rent Price/Sq. Ft
To narrow down your search even further, try using our Draw Tool to highlight a specific street (or even side of a street!). From there, get a Rental Estimate so you can understand what properties in a given area can rent for.
Fun Fact: Our Heat Map allows you to see a visual representation of the hottest areas depending on the filter you choose!
Other Considerations To Keep in Mind
Choosing a property is only part of the process when it comes to investing in rental properties as a beginner.
Before you purchase a property, here are a few questions you’ll want to ask yourself:
Do I Want to Be a Landlord?
Being a landlord can be harder than it looks. For starters, if you’re managing the property, you’ll be responsible for all of the property’s maintenance, financially and physically.
For example, if a pipe bursts in the middle of the night, it’s your responsibility to get out to the property and fix it ASAP. When you’re managing a property short-term or long-term, you have to be available at the drop of a hat to handle emergency situations.
Additionally, you may end up with a tenant who refuses to pay rent on time or at all. As the landlord, you’re responsible for chasing this tenant down to collect rent. In the worst-case scenario, you may have to evict the tenant if failure to pay rent becomes a pattern.
Luckily, you do have the option to work with a property management company if you don’t want to deal with the day-to-day inconveniences of managing a rental property. Keep in mind, property managers will take a percentage (the percentage will depend on the property management company and the type of property you own) of the property’s earnings as payment, leaving you with a smaller return on your investment.
How Will I Fund the Property?
Typically, for a rental property, you should expect to offer at least a 10-15% down payment if you can’t purchase the entire property in cash. With the down payment, you’ll also need to take out a loan to cover the rest of the cost of the property.
The loans you qualify for will depend on your credit history, debt-to-income ratio, property type, and a variety of other factors. Before choosing a mortgage loan for your rental property, we strongly recommend weighing the pros and cons of each and thinking about the type of interest rate you can support combined with your loan.
Ready, Set, Rent!
If you enjoy working with people and want to earn passive income through real estate, investing in rental property may be the best path for you!
Once you’ve decided on your ideal rental terms, narrowed down a property type, and made a plan for funding your investment, you’ll need a killer real estate investing software to perform deep dives on specific properties.
With PropStream, you can use detailed real estate data and a wide variety of filters to find the best landlord leads and make your pitch in one convenient location. Try it for 7 days, free!