by Dennis Spivey, VP of Originations
Tired of the sub 1% interest you’ve been making on the money in your savings accounts? Like most, you know you can do better. Yet, you’re sheepish on certain investments like the stock market because it’s just too confusing and a bit too risky. Plus, we’re due for a crash, right? Then it hits you one day – “I should buy a rental property!” This investment will be great. It’s a hard asset, which appreciates over time, there are tax benefits, and it creates great long-term residual rent income. This is the solution to your problem of low-interest savings! Everything is fine until you realize the challenges you are about to experience…
Maybe where you live, houses are very expensive. And wait, you’ve also got to put 25% down payment in order buy one? And the bank isn’t going to give you credit for the rental income in qualifying for a loan? How do you know which rental property will create the best return on your investment? Once you buy the house, how do you get a tenant in the home, and for how much rent? Who will manage the home? You know what? It’s just too complicated. You decide to go back to your safe, guaranteed savings account and move on.
If this is a thought process you’ve experienced, you’re not alone. It is true that real estate and rental properties can be excellent investments, especially over time. It is true that you can potentially create consistent long-term income by purchasing rental properties. And now, with the services available to would-be investors, it is true that you can potentially find, acquire, and manage rental property nationwide in a short period of time.
The following three keys can help you get started, or help you expand your existing investment holdings.
#1: Identifying the Right Property, Anywhere
It’s important to do your research and find the right rental property to invest in. However, consider expanding that search outside your local area – in fact, many experienced rental investors look outside of their hometowns and even outside of their home states. In some markets, rental homes can cost hundreds of thousands of dollars, while in others, you can pick up a single family rental house for $50,000. Don’t get convinced that just because the homes in your local city are too expensive for you, that you can’t own real estate at all.
Look to new markets where your money can go the furthest. When looking, the internet is a treasure trove of information. Not only can you view listings and see the inside of homes for sale in your target area, you can use Google to drive up and down the streets and see the neighborhood around most homes.
There are even companies that will sell you homes that are already leased, which helps you better understand the returns you can achieve on a specific property. Roofstock.com is a great resource and marketplace of turnkey rental properties and helps take a lot of the guesswork out of buying, especially if the home is not in your local area. If you’re looking for a bargain property, Auction.com can give you access online to foreclosed and bank-owned homes nationwide.
Don’t settle for limited information when doing your search. Use the internet to your advantage and increase the supply of potential opportunities by searching markets other than your own.
#2: Managing Your Property, Properly
Successful management of your property can make all the difference in maximizing the profitability of your rental home. Depending on the size of your investment holdings, and the location of your home, it can make sense to self-manage. You can find some helpful tips on our previous blog: 3 Ways to Improve Property Management. If you are looking to grow your business, or looking to other markets for rental properties, it may be beneficial to consider a professional management company.
Again, the internet can be your best friend when looking for the right manager. Companies like RentersWarehouse.com can provide management in most markets nationwide, giving you the ability to acquire homes in multiple markets and have them managed under one firm or point of contact. This can also allow to you focus your time and energy on buying additional rental properties and growing your business.
#3: Finding a Reliable Financing Partner, Specializing in Rentals
For many, cash is king. But when cash is limited or runs out, they begin to see that leverage is king. Leverage can even take you further than cash from the very start. That’s why it’s imperative that you identify a reliable financing partner when you first decide to invest in real estate. Consider this example: Let’s say you have $100,000 to invest in real estate. Your options in this scenario are to buy one $100,000 rental property all cash, or buy four $100,000 rental properties using 75% financing. Using leverage allows you to buy more properties.
Let’s say the rent on these homes is $800/month. If you pay all cash for one home, your gross return would be 9.6% ($9,600 in annual rent divided by your $100k investment). If you finance four homes, your gross return increases to 16.8% ($38,400 in annual rent, less $21,583 interest payments at 6%, equals $16,817 in income divided by your $100k investment) *These estimates are for discussion purposes only.
When searching for a lender, keep in mind that banks generally have strict guidelines when it comes to financing investment properties. They are also limited in the amount of loans they can provide to any one investor. With private lenders like Corevest, they specialize in residential investment loans. And, in our case, we often tailor our products to your specific needs. We have done this for thousands of investors, closing over $2.5 billion in loans for nearly 20,000 properties.
As I mentioned, rental property investments have the potential to dramatically change your financial well-being. They can create income, appreciate over time, and potentially carry large tax incentives. If you choose to put your money to work, rentals are a great way to do so. Just remember to use the tools around you, and the tips above, to research whether buying a rental property is the right move for you. If you already invest in rentals, use the information available to evaluate expanding your rental portfolio.
CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how Corevest can help grow your rental and rehab business, please call Dennis Spivey 310.752.5025 or email firstname.lastname@example.org.