Finding the right property, paying a fair price, putting the right amount of money into it, setting realistic rental rates, and knowing what you can expense are all key factors for succeeding in rental property investing.
The goal is to end up with an asset, which produces a positive cash flow month after month; but making a bad buying decision, not knowing how to properly set rental rates, or showing your property in a state of disarray will result in you losing money instead of making it.
1. Find the Right Investment Rental Property
There’s a lot that goes into finding the right property. You need to decide what areas you want to invest in, what type of property you’re looking for, whether or not you want a fixer upper, how much money you can invest in a fixer upper and still create a positive cash flow, and what types of renters you want to attract with your property.
Finding just the right property to buy and hold as a rental has its challenges, but follow these simple tips and you'll end up with plenty of properties to choose from.
Working with a real estate agent
First, consider whether you want to look for rental properties on your own or with the help of a real estate agent. If you’ve been investing for a while, then you’re probably happy to view and buy houses on your own. But if you’re new to real estate investing, you might want the expertise of a real estate agent by your side.
Advantages to working with an agent:
- They know the local neighborhoods. Their livelihood depends on them being educated on what the market is doing and how it’s performing in certain areas. See how your rental market is doing here.
- They know what to look for in a property. Whether you're looking for a fixer upper or a move-in ready property, an agent can guide you in the right direction.
- An agent who is active in the market will know whether a property is overpriced or underpriced and will be able to offer you their educated opinion on what to offer.
- They will also be educated on how well properties hold their value in the area.
- They will pull comparable properties, giving you further proof that the asking price is high, low, or right at market value and additional supporting .
- An agent will be able to recommend home inspectors who will look for potential issues with the property.
- They will manage the entire buying and closing process, giving you more time to find deals.
Using an agent is especially helpful if you’re new to real estate investing and are looking for a little guidance on your first few deals, but you will likely find yourself getting comfortable with the ins and outs of investing rather quickly and feeling less dependent on an agent.
Get Pre-approved or secure private funds
Make sure your finances are in order and either get pre-approved with a lender or secure private funds for the purchase.
If you’re getting pre-approved with a lender, they will check your credit, verify your income, assets, and expenses, and, when you’re pre-approved with them, will give you a pre-approval letter which will help speed up the buying process.
Do Your Research
If you choose not to contact an agent for your property hunt, make sure you understand the market you plan to invest in. Knowing your market will help you avoid overpaying and will allow you to work on deals with sufficient room for positive cash flow.
Consider all the advantages and disadvantages for properties that are considered “fixer-uppers.” I recently posted an article about how to quickly identify a money pit, so pay special attention to the items mentioned in that article when evaluating a “fixer upper” type of property.
A lot of major repairs can mean a large investment of time and money so it's essential to do a complete repair estimate and deal evaluation before jumping into a purchase.
Get a Home Inspection
Before you even consider putting your money into a property, make sure you have taken the time to inspect it. Have a professional home inspector do a full inspection, especially if this is one of your first deals. Home inspectors are extremely thorough and oftentimes miss hidden issues that most of us wouldn’t see until it’s too late. Most offers are contingent on a full home inspection so you can feel comfortable submitting an offer before the home inspection has been done.
If you’re an experienced investor, you probably trust yourself to thoroughly evaluate the property, but I would suggest you always do a complete repair estimate before making an offer so there aren’t any surprises down the road.
Also, be aware of the city’s housing codes and take into account anything that is not up to code as those items will be first on your repair list.
I've seen too many people make the mistake of settling for a property simply because they're in a rush to invest. The result is often an investment that requires more effort and money than the investor had originally planned and a reduced profit margin. There are plenty of properties out there and with a little patience you will find the right one.
2. Inexpensive Rental Property Repairs
Maximizing the profits of your investment means keeping repair costs to a minimum. You can maintain quality renters and positive cash flow by making repairs and improvements that don’t cost a fortune.
Outdated switch plates and outlet covers should be replaced throughout the entire property, costing you no more than a few dollars each. New white switch plates look sharp and can breathe new life into a room. Though these features may seem minimal, they are the type of improvements that give a new look to a property for very little cost.
Doors and Door Knobs
Doors are one of the first things a potential renter will notice. Upgrade the doorknobs to capture the attention of a future tenant. For a few dollars more you can spruce things up and replace older door knobs with new satin nickel finish door levers. This finish and style are very popular right now and add a lot of shine to a property for very little cost.
Any worn or cracked trim should be replaced. This doesn’t mean investing in crown molding throughout the entire property; however, adding it to the entryway or living room will make a great first impression if you have the means to add it. At the very least, addressing any obvious trim issues will keep the property looking well maintained.
Update the Entryway or Foyer
Investing in the right features will rent your property for you. Your property has one chance to make a good first impression and with the entryway or foyer being the first glimpse a potential renter has of the property, it needs to impress.
Tiling the foyer can be a great way to do that. A small foyer area measuring 8x8 can easily be tiled for about $100. A decorative console table with flowers, a mirror to create the illusion of extra space, and new paint are all great for making this an inviting space that brings potential renters further into the property.
We recently posted an entire article centered on creating a great first impression with the entryway. Check it out for more tips.
The kitchen is one of the most important rooms in the house and can make or break the deal for prospective tenants. Painting the kitchen is a gallon of paint and a day’s work and can completely refresh the entire space. If the cabinets are outdated, take the practical approach and repaint them with a semi-gloss for a nice, clean finish rather than tearing them out and replacing them all. Adding new hardware can also freshen up the kitchen for a very minimal cost. Adding a backsplash is also an inexpensive project that adds a wow factor to the whole kitchen.
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3. Setting Rental Rates
Setting the right rent can be difficult, especially if this is your first rental property. If your property rents out very quickly, it could be an indication that your rental rate is too low. On the other hand, if your property takes a very long time to rent, you may be asking too much. Set your rental rate in line with the current rental market in the area by following these practices.
Do Local Research
Knowing what rental rates are driving the local market is key. Check out the current rates for rental properties similar to yours. Location is the most important factor in determining rental rates so be aware of your property’s location and current market trends.
A three bedroom, one bath home in one part of town may rent for a $950 a month while a similar property on the opposite side of town may only be able to draw $500 a month.
Convenience is a big factor for some renters, while trendiness is a driving factor for others. Because of this, you need to be clear on what type of neighborhood your property is in and the type of renters that you’re catering to. This will affect how you market your property, what factors you focus on when talking with potential renters, and ultimately, how much you can ask for rent.
It’s also common for square footage to play a role in determining rental rates, meaning that larger homes and units will typically rent for higher rates than smaller homes and units.
Keep in mind that rental rates can cap out when interest rates are low. There’s a certain point where it no longer makes sense to rent if purchasing a home is less expensive and this will impact your rental rate and the number of potential tenants you have to choose from.
Local Landlord Association
Joining your local Landlord Association is a great way to keep your finger on the pulse of the local rental market. Emerging trends in the area will affect not only you, but other landlords as well. For example, if a particular area is in an economic slump, or boom, that will have a major impact on local rental rates. Talking with other landlords about what they're experiencing is a great way to stay on top of what's happening in your local market.
Evaluate the Amenities Your Property Offers
Keep in mind that basic amenities can play a role in determining how much rent you can charge for your unit. Most prospective tenants expect the basics as a bare minimum.
- off-street parking
- washer and dryer
- refrigerator and stove
For a property without these basic comforts, you will want to offer some incentive that would attract prospective tenants or lower your rental rate.
If you pay for heat and water, you may be able to charge a little more. If your property has a pool, you can charge more than a similar property without a pool. If you allow pets, you can charge an extra pet deposit. See how other properties stack up against yours when determining your rental rate.
4. The right way to show your Rental Property to Potential Tenants
The only way you’re going to rent your property is to show it to potential tenants. To have one of those people want to rent it, it has to look and feel welcoming when you show it.
Curb appeal is just as important to tenants as it is to buyers. An unappealing exterior can turn away prospective renters before they even get in the front door.
Overgrown bushes and grass, a dirty or worn exterior, or toys or garbage scattered over the yard will turn off possible renters before they even make it inside.
Make sure that your property is inviting and shows the care that you put into it maintaining it. The landlord has just as much to do with the decision to rent as the property itself, so if prospective tenants see that you take good care of the property, they will be more likely to rent from you.
Make All Repairs Prior to Showing
Be sure to address all repair issues before showing the property to prospective tenants. It is never a good idea to show a property that is still in the process of being repaired or renovated so wait until the property has been completely fixed up before showing it. Showing your property is like going on a first date - you want to put your best foot forward.
Clean, Clean, Clean
Nothing makes a bad first impression like a dirty property. Make sure that you do a deep clean on the entire property, including the carpet. Ideally, it is best to have the carpet professionally cleaned after the previous tenant moves out and before you show the property to the next prospective tenant. Be sure to allow plenty of time for the carpet to dry before you actually show the property to anyone. Never put off replacing worn carpet as this can cause problems in attracting quality tenants.
Know Your Property’s Best Features
Take the time to make sure you know the most important selling points of the property before you show it. Is it the convenience, the trendy area, the amenities, the large family room, or the yard?
Make a Good First Impression
You will want to make sure your property is in proper shape before you showcase it to any potential tenant. Make sure the temperature inside is comfortable and the lights are on so it’s nice and bright. If the weather is cool, light a candle to give it a more cozy feel. Just make sure the candle scent isn't overpowering; you don't want to seem as if you're trying to cover up a foul smell. Fall and winter scents that are well received are pumpkin, apple, or an apple pie or sugar cookie.
You can even stage the property with some furniture, window treatments, and kitchen and bath accessories to give it a more homey feel.
Make sure you show off the exterior and the grounds of the property as well. If there is something unique about the outside, make sure prospective tenants see it. The key is to give prospective tenants an idea of how nice it will be to actually live there.
Finally, make sure you are always prepared for all showings. When you show a property, you need to make sure that you have a rental application on hand as well as a copy of the lease. Make sure that you have decided on terms such as security deposit amounts, pet deposits, and key deposits. If someone is ready to complete an application or sign a lease agreement right then and there, don't give them the opportunity to go home and rethink their decision by not having the appropriate paperwork on hand.
5. Tax Deductible Expenses
If you own a rental property, it’s important to make sure that you understand possible deductions in order to improve your profit margin as much as possible. As the owner of rental property, it is always a good idea to consult a tax attorney or tax consultant in order to ensure that you have a good understanding of the items that may be tax deductible. Below is a guide to some of the most common items that are frequently tax deductible for owners of rental property.
Understand Improvements vs. Repairs
Many owners of rental property commonly make the mistake of believing that anything they do to their rental property is tax deductible. This is not always the case. A repair is essentially anything that you do to the property in order to keep it in good condition. It is often tax deductible for the year in which the repair is paid for.
Common examples of repairs would include:
- repairing a broken toilet
- replacing faulty light fixtures
- replacing a broken sink faucet
An improvement, however, is something that you do to the property in order to add value. Improvements are not typically tax deductible at the time that you pay for it. However, you may be able to recoup the cost of improvements by depreciating the cost over the life expectancy of your property.
Common examples of improvements would include:
- adding a garage to the property
- putting a new roof on
- putting new windows in
Mortgage expenses are often one of the biggest and most common tax deductions you can take when you own rental property. This is only an option if you have a mortgage on the property.
It should be noted that any expenses that you incur in order to obtain the mortgage are not actually deductible at the time you pay for them. Common examples would include appraisals and commissions. Once you begin actually making the mortgage payments, however, you will typically be able to deduct the portion of the payment that is paid toward interest.
Always keep these records, however, you should receive a Form 1098 from your mortgage company that will detail how much you have paid in interest for that year.
You may incur travel expenses in relation to caring for your rental property. Keep in mind that these expenses are typically only deductible if they are incurred in order to either maintain your rental property or to collect rent. In the event that you have to travel to make improvements to the property, these expenses are not deductible immediately. Instead, you may be able to recover the cost as part of depreciating the improvements.
Keep in mind that you have two options when it comes to deducting travel expenses. You may choose to deduct the actual expenses or you may choose to take the standard mileage rate.
There are also many other expenses, which you may be able to deduct on your taxes. These expenses may include insurance, lawn care, taxes, tax return preparation fees, and any losses, which result from casualties such as earthquakes, floods, thefts, hurricanes, etc.
Special Rules for Condos or Co-ops
If you own a condo or a cooperative, you will want to look into the specific rules that apply for these property types. With a condo you may pay assessments or dues that are intended to provide for the care of common areas.
When renting out a condo, you can typically deduct expenses such as repairs, taxes, interest, and depreciation. However, you usually cannot deduct any expenses that were spent on improvements. These costs must be depreciated over the life expectancy of the property, just as if you owned a single-family rental property.
With a cooperative, you may be able to deduct expenses such as maintenance fees. Capital improvements are a different matter, however. You would not typically be able to deduct the cost of improvements and you also would not be able to depreciate the cost. Instead, you need to add the cost of those improvements to a cost basis in the stock of the corporation. If this situation applies to you, be sure to speak with a tax attorney or tax consultant.
Always be prepared to back-up any expenses that you deduct on your taxes. These expenses must be carefully documented so you can provide documentation, including receipts, if needed.
If you have any other tips for increasing your net rental income, please share them below.