Are you a beginner investor that’s considering rental property investing? You’ve come to the right place!
This rental property investing for beginners guide will help you understand what it takes to get started as a rental property investor. We’ll walk you through the real estate investing strategies, cash needed to purchase, truths/myths about real estate investing, and much more!
Why Consider Purchasing A Rental Property?
Rental properties are an exceptional way to build wealth. You can utilize real estate to gain cash flow, get long-term appreciation, or create quick capital.
Real estate can be an active or passive investment. There are so many different ways to increase your net worth within real estate. Honestly, we think it’s the best road to achieving financial freedom.
Rental Property Investing For Beginners | How To Get Started
What are your current money habits?
Let’s get real. If you want to start investing in real estate your going to need some money to get started. Yes, there are ways you can get started with $0 but that typically only works with certain strategies and unique seller situations.
I’m guessing that you fall into one of these 2 categories if you’re a beginner rental property investor.
- You Have Money But No Experience – This is great because you already have the money problem figured out! You’ll need to focus more on picking a strategy and knowing your market. You might also need to begin working with a lender and agent.
- You Have No Money And No Experience – Don’t fret, many rental property investors have started the exact same way! You’re going to need to spend time educating yourself, saving money, working with lenders, working with agents, nailing down your strategy, and selecting the right market.
Why Money Habits Matter With Rental Property Investing For Beginners
Saving capital is key to getting started with rental property investing for beginners. Create good financial habits by living beneath your means to help propel you forward when trying to cover that first down payment.
Once you’ve picked a strategy, property type, and market, you’ll have a better idea of how much you will need to acquire that first rental property. Get serious about budgeting and put together a solid plan to build up the necessary funds to move forward.
Making sacrifices with your money can have a massive upside on your financial future. Delay purchasing things that you want and put all extra money towards your savings.
Stop making frivolous purchases!
Take some time to learn and fully understand real estate investing. Too many new investors jump in quickly without doing proper research and due diligence. Don’t be that investor that fails because of not truly knowing the investment!
All of the information you need is available online for free. Seriously, you don’t have to pay one of these gurus loads of money to learn real estate. Putting in the time and effort to educate yourself will pay off tremendously in the long run.
Here are some of our favorite resources for learning about real estate investing.
- BiggerPockets – This should be your #1 go-to place for anything real estate investing-related. The forums are packed with seasoned investors that answer questions quickly and give awesome feedback. They also have free webinars for newer investors.
- BiggerPockets Rookie Podcast – Learn from other successful rookie real estate investors and how they got started.
- Passive Real Estate Investing Podcast – Another great podcast to learn about passive real estate investing.
No matter what level of real estate investor you are, you should be continuously connecting with others and learning.
Selecting a strategy is one of the beginning steps to acquiring that first rental property. After you’ve selected a strategy, you’ll have a better idea of what type of properties you should be looking to purchase.
Stay tuned for a more in-depth article that covers many other types of strategies.
Long Term Buy And Hold
Are you looking to build long-term wealth? Would you like monthly cash flow?
If you answered yes, long-term investing might be the correct strategy for you. Look for properties that will help you build wealth over time. Make sure to run your numbers and purchase cash-flowing properties!
More than likely, you will need to put at least 20% down. Be sure to get preapproved by your lender so that you have a good idea of what type of home you can afford.
Do you need to build up cash? Are you able to rehab yourself or manage a crew to do the rehab?
Consider flipping. You still need to figure out how you will finance your flips. If you don’t have the money yourself, you can look into using hard money or other people’s money.
Make sure that you are able to properly estimate rehab costs. You don’t want to put in a ton of work and end up with $0 in profit due to missing the mark on your rehab costs.
Utilize the live-in flip strategy to purchase a property with a lower down payment since it would be your primary residence. This is an awesome strategy if you like to do the rehab work yourself.
House hacking is one of the best ways to get started with real estate. With a house hack, you purchase a property as your primary residence and rent out spare rooms or other units. You can purchase small multifamily, a single-family home, or condo/townhouse and put the house hack strategy to work.
House hacking is great because you lower your own cost of living while purchasing real estate. It’s a fantastic way to start!
This strategy isn’t scalable though. You might need to shift your strategy after buying a few house hacks.
This is another great strategy to get started with. The nomadic strategy involves purchasing a new primary residence every few years and turning your previous home into a rental property. You can get away with putting less money down using this strategy.
The biggest advantage of this strategy is knowing the condition of your rental property.
Do you live in a hot market that others like to travel to? Investing in vacation rentals might be a solid option. Short-term vacation rentals can require quite a bit more work. You’ll either need to manage and clean the property yourself or hire those out.
Run the numbers on a vacation rental versus placing a full-time tenant.
Rental Property Investing For Beginners – Choosing Your Market
What market will you be purchasing in?
Try to find a market within an hour of where you live. Sometimes this isn’t feasible due to property prices or availability. Make sure to find a market that you are comfortable with and understand.
Why do you want to invest in that market?
You should be able to have a solid answer to the previous question with data to back it up. Don’t just select a market because you’ve heard that other people are investing in that particular place. Build your own criteria on why that market works for you.
Nice work on selecting your market and strategy! Now you need to think about what type of investment property that you should purchase. There’s no wrong or right answer here. Find something that fits in with your strategy, market, and budget.
Here’s a list of a few possible property types.
- Single Familly Home
- Condo or townhouse
- Small Multifamily – 2-4 units.
If you are considering condos or townhomes, watch out for the HOA’s. They can be cashflow killers! There are many other properties types so continue to do research until you find the right type for your strategy.
As mentioned earlier, money is a big barrier to purchasing rental properties. It can be tough to save up that 20% for a down payment. If you are investing in an expensive market this can be brutal. Do you have $80k – $100k saved for a downpayment on a $400k – $500k property? I don’t have that much money sitting around!
Begin Working With A Lender
First things first! You absolutely need to start contacting lenders if you will be financing the property. What’s the point of looking for properties if you don’t even know what you can afford? Find a lender and get pre-approved! That way you know what kind of budget you have at your disposal.
If you cannot get approved by a lender, be sure to ask them what’s holding you back. You can then start attacking debts, building credit, or fixing whatever is blocking you from getting financed.
The Down Payment
It’s time to start saving for that down payment! You should have a general idea of what your down payment will be now that you are pre-approved by a lender. Be sure to factor in closing costs and any inspection fees.
Put together a strong budget and plan to save the needed funds.
This is where the benefits of house hacking, doing a live-in flip, or using the nomadic strategy are huge. You can put down as little as 3.5% with an FHA loan or 5% with a conventional loan. FHA is a bit more strict and can be tough to use in a competitive market. I really like using the 5% conventional loan.
With these strategies, you can purchase a property as your primary residence and turn them into a rental property when you move into your next home. This is great for starting out when you don’t have a ton of money saved up for a 20% down payment.
Some rural areas might have the option of a USDA loan. It’s possible to purchase a primary residence with 0% down with a USDA loan.
Are you or your spouse a veteran?
If so, I thank you for your service! You might want to look into your options with a VA loan. These loans offer low-interest rates and possibly no money down.
Benefits Of Rental Property Investing For Beginners
There are numerous ways to build wealth with rental properties. Contrary to what others say, it’s really not that difficult. Yes, you will end up with problems that you have to solve. But many rental property investors have been through these hurdles and come out the other side unscathed and with tons of equity.
- Cash Flow – Cash flow keeps you in the game! Decide how much cash flow you want per unit for your strategy and use that when running your numbers. Getting monthly cash flow can help you save up funds for the next down payment.
- Appreciation – Some markets appreciate faster than others. You might need to take that into consideration when selecting a market. Appreciation is the icing on top of the cake. It’s kind of like a bonus that you get just for holding the property. You can also force appreciation by rehabbing a property!
- Principal Paydown – Your net-worth will slowly build as your tenants pay down your mortgage.
- Taxes – There are so many tax breaks available for real estate investors! You can depreciate your properties to lower your taxable income. You can sell a home with no capital gains taxes if you’ve lived in it for 2 of the last 5 years. The 1031 exchange allows you to sell properties and roll all of the profits into other investment properties without paying taxes.
Downsides To Rental Property Investing
There are some obvious downsides to real estate investing. Many of the cons can be mitigated with due diligence, by creating systems, and setting solid standards for tenants and the type of properties that you purchase.
- Bad Tenants/Evictions – I personally haven’t had to go through an eviction but I’ve heard that it’s almost a right of passage as a real estate investor. You can help prevent leasing to bad tenants by using a thorough screening process. Don’t just rent to anyone!
- Things Break – Roofs wear out, air conditioners and heater break, water heaters will go out. These are costs that should be accounted for by saving funds for capital expenditures and maintenance.
- Vacancy – Vacancy is enemy #1 to a real estate investor! Having a vacant unit for a few months can destroy your cash flow for that given year. Make sure that your rents are not too high. Sometimes it pays to drop the rent price and sacrifice a little cash flow to get a tenant in the unit. Just be sure to properly screen all tenants!
Truths About Rental Property Investing For Beginners
Let’s go over a few truths about real estate investing. These topics might cover a few things that a beginner real estate investor might not know about.
- Reserves Are Necessary – It’s easy to forget about this as a beginner investor. You should always have some money set aside for when shit hits the fan. You might run into issues getting approved for financing if you don’t have at least 6 months’ worth of reserves saved.
- It’s A People Business – Whether your self-managing or have a property manager you will have to deal with people. Sometimes tenants will go through rough patches and you’ll need to work with them. Don’t be the landlord that all tenants despise!
- Real Estate Investing Builds Wealth – You can build substantial wealth with principal paydown and appreciation. Remember to purchase cash-flowing properties to help you hold onto them over long periods of time.
- Equity = Options – Building equity is where the true power in real estate lies. You can tap into that equity to expand your portfolio or pay down existing mortgages.
Real Estate Investing Myths
Let’s go over a few myths about real estate investing for beginners. There is plenty of misinformation on the internet. You may also get bad info from people that you know. Trust experienced investors over the naysayers!
- You Can’t Do It – You might hear this from coworkers, family, and friends. Do not take it to heart! Anyone can become a real estate investor with some knowledge, education, and action. Do you want to take advice from someone who has never owned rental property?
- All Tenants Are Bad Tenants – This is such BS! There are plenty of great tenants. However, certain property types do attract lower-quality tenants. Be sure to fully understand your market and property type before pulling the trigger. Proper tenant screening is crucial!
- It’s Difficult – Anyone can make this argument for something that you try for the first time. Real Estate Investing really isn’t that difficult when you break it down. Starting off small allows you to learn while gaining experience. Education is key!
Alternatives To Real Estate Investing
Let’s check out some other types of real estate investing options. These types of investments might work for you if If you don’t want to deal with tenants and property managers.
- REITs – A Real Estate Investment Trust is a company that manages a portfolio of real estate. These companies are publicly traded on the stock market and you can purchase them just like other stocks.
- Real Estate Crowd Funding – Crowdfunding allows you to pool your money together with other investors to purchase real estate. This might give you a little more control of the type of investment property that your money will purchase. That money will be locked up for a long period of time to fully take advantage of this type of investment.
Wrapping Up Rental Property Investing For Beginners
We hope that this article has helped you get a good picture of what it takes to start investing in real estate. In our opinion, building up a rental portfolio is one of the best ways to achieve financial freedom.
What’s your reason for wanting to invest in real estate?
Hi, I’m Richard. I’m passionate about figuring out how to make my money work for me and getting outdoors into mother nature.