Investing in Rental Property

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There are a lot of ways to invest in real estate. Trust me – I made the list of the Top 100 Ways to Invest in Real Estate. However, one of the most tried and true methods of building serious wealth in this world is through investing in rental property. This post is going to look at why rental property can be such a powerful investment tool and how you can begin investing in rental property to start making your future more secure.

Why Invest in Rental Property?

Some people invest to get rich. Others invest to get out of a job. Still others invest so their children have an inheritance and grandkids have a college education. Whatever your reason for investing – investing in rental property can help you get there – and can be one of the quickest and safest investment vehicles around. Rental property allows you to take advantage of several distinct benefits:

  • Leverage- Leverage is the ability to use only a small amount of cash to purchase a much larger investment. When investing in real estate, you don’t necessarily have to pay the full amount for the property. Instead, you can pay a “down payment” and get a bank or private investor to fund the remaining. While you may only have 10-20% down (or as low as 3.5% with an FHA Loan) you are able to control 100% of the property and take advantage of 100% of the appreciation, cash-flow, and other benefits.
  • Security- Investing in rental property is generally considered one of the most secure investments you can make, as contrast to methods like flipping or speculation. When you buy smart* you are able to make more monthly income from rent than what it costs to own the property, and the extra monthly incomes (cash flow) can be used to cover the times when the property is vacant or needs repairs.
  • Tax Benefits- The government likes real estate investors, because they provide housing for millions of Americans, and as such – they reward rental property owners with tax breaks and incentives to encourage this type of investing. Benefits like depreciation or the ability to “trade up” to larger properties without paying any tax (see the BiggerPockets guide to 1031 Exchanges) can help compound your wealth even faster.
  • Directly Actionable- Finally, investing in rental property gives you an investment that you can directly control. When you buy a stock, you have very very little (if any) control over what the company does and how it operates. Your trust is placed 100% in the hands of Wall Street types and when things go south – your only option is to sell the stock or hang on. When investing in rental property, YOU get to actively take a role in the destiny of your property. You can maintain it, improve it, choose the right tenants, pick the right manager, correct problems, and influence local government to support you.

 

Different Methods of Investing

There are several different ways that you can invest in rental property, which this section is going to look at. This is not a comprehensive list, but simply a sampling of what is possible.

  • Single Family Homes – Perhaps the most popular method for investing in rental property, the single family home is a house that you can rent out to a single family (or individual.) Generally, these properties are fairly easy to find and fairly easy to finance. Single family homes generally have a higher likelihood of obtaining long-term renters thus an increased chance for stability. On the down-side, when a single family home is vacant, you lose 100% of the rent for that time.
  • Small Multifamily Properties – A personal favorite of mine, the small multifamily is typically between two and four units and can be found in practically every area of the world. The small multifamily offers the ability to receive multiple rents from multiple different tenants, thus diversifying your income to compensate for times of vacancy. In other word – when one unit goes vacant, you still have income from the other units to help pay the bills. Another unique advantage of small multifamily properties is the ability to finance using conventional loans from banks (just like a normal mortgage you would get on a single family house.) This is especially helpful when you plan on living in one of the units, so you can take advantage of the 3.5% down payment requirements given by FHA insured loans. For more on this kind of investing, see New Investor Strategy: How to Buy Your First Multi-Family Investment Property & Live Rent Free.For more information on how to buy a small multifamily property, check out my detailed and comprehensive post, How to Buy a Small Multifamily: A Step by Step Case Study.
  • Large Multifamily- Investing in rental property with five units or more becomes a slightly different game, at least in terms of lending. When buying this kind of property, you will be using a “commercial loan” which typically requires higher down payments and interest rates, but shorter term lengths. However, if purchased at a good price, large multifamily properties can quickly produce significant cash flow and a high return on investment.

How to Get Started Investing in Rental Property

Your first step in investing in rental property is to get educated. Congratulations – you’ve already started on step one! This blog post, along with the thousands of others here on the BiggerPockets blog, as well as the more than 500,000 forum posts over on the BiggerPockets Forums will definitely help you get the education (for free) that you need to move forward.

“(If you are new to real estate, don’t miss our free online book, The Ultimate Beginner’s Guide to Real Estate Investing. This free online book (or downloadable PDF) will walk you through all the steps needed to get started with real estate investing!)”

Your next step is to create a plan. As I often say, you wouldn’t take a road trip from Canada to Argentina knowing only that it’s South. You need to have a road map to guide you . Your plan is your road map, and it will help you stay on the right path and avoid dead-ends, wrong-roads, and “shiny objects.” Your plan includes

  • your starting point;
  • your goal/destination;
  • deciding what kind of investing you want to get;
  • how much you want to pay;
  • where you want to buy (neighborhood, tenant type, etc);
  • the level of risk you want to take;
  • the financing you plan on using and
  • any other important information you can think of!

Once you have done all your homework, thoroughly understand the kind of investing you want to do and you have your plan in place – you simply need to follow your plan! Yes, it may change slightly and you may need to correct-in-course, but the hard part is done.

Best Resources for Rental Property Investing

Photo: Glenda Cherry

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About Author

Brandon Turner (G+) is the BiggerPockets.com Senior Editor and Community Director. He is also an Active Real Estate Investor (Flips, Apartments, and Buy-and-Hold), Entrepreneur, World Traveler, Third-Person Speaker, and Husband. Come hang out with him on Twitter!

15 Comments

  1. Actionability is huge! It’s so frustrating watching stocks or mutual funds fluctuate based on info that has nothing to do with the stock.
    I think it is crazy to plan for retirement by guessing how much to save based on how old you may live. Cash flow is king.

  2. Anthony Sera on

    Brandon – Want to throw a question at you and if this is one for the forums, let me know, I will switch. I am a part time SFH investor, and I’ve been following your threads and strategy on investing in small(er) multi family units. I’ve been researching this space for a little bit now but one aspect I cannot understand is this – I live in an area where larger complexes (say 50+ doors) are always present in the attractive rental markets. As a renter why would someone ever consider renting a unit in a smaller complex (say less than 8 units) when the larger complexes will almost always have better amenities, onsite management, covered parking etc.? Do you compete with the bigger units on (rent) price? The only exception I’ve seen where the smaller units compete successfully is when they are right next to a college where students can walk to class (location advantage of course). Thanks for any input and I appreciate the work you are doing here at BP.

    • Brandon Turner

      Hey Anthony,

      It’s a good question, but I think you nailed it – price. I have an apartment and we charge $525 a month for a 2 bedroom. Most similar small multifamily properties are about the same. The nice, big apartment complex down the street a mile charges $750 a month for rent for a 2 bedroom. Obviously, those units are much nicer but for a renter with limited income – that $200 a month is HUGE. So they will come. At least in my area. Plus, some people don’t want to live at a complex, they’d rather live in a neighborhood.

      Hope that helps some! Obviously, all areas are a little different so it’s something to think about and look more into, but those are my thoughts!

  3. karen rittenhouse

    The only downside I can find to rental properties is tenants…

    If you don’t want to deal with tenants, hire a property management company. Problem solved!

    Another great post, Brandon.

  4. Excellent blog and the commentary is right on, including your responses Brandon. Real estate investment allows for obtaining leverage much larger than the average person could otherwise achieve. However, I prefer to use the words real estate investment business, even if it is only one property. If you treat it seriously as a business, which includes up front analysis, pro-forma budget, simple demographic and future upside potential analysis prior to making the investment, and then credit and reference checks of prospective tenants and dealing promptly and courteously with any tenant issue, you can’t help but see your wealth grow as a result.

    If you have the proper equity stake and work it as a business, and you have the benefit of time to work for you, it is extremely difficult to lose money, unlike stocks/mutual funds, IMO anyway.

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