03 May THE BEGINNER’S GUIDE TO INVESTING IN LONG TERM RENTALS
Are you curious about the ins and outs of long-term rental properties and how to invest successfully in them? Then, keep reading our comprehensive beginner’s guide to investing in long term rentals.
Long term real estate investment is purchasing a home with the purpose of renting it out for a long time. The real estate investor intends to keep the property for the long term, it’s also known as the buy and hold approach. Long-term rentals (also known as conventional rentals) are the most popular investment option among both novice and seasoned real estate investors.
It’s a terrific option for new investors to enter into real estate investment because it’s easier than the fix and flip loans plan and doesn’t require any experience. Experienced investors agree that this is a good way to diversify their portfolio and accumulate money over time.
The Benefits of Investing in Long Term Rentals
#1 Monthly Rental Income
The monthly rental income generated by conventional investment properties is one of the key advantages. Other sources of income for a rental property include vending machines, laundry, and parking fees (if these services are provided). This may be passive income for a real estate investor and is often collected on a monthly basis.
Note: You must set your rent pricing accurately to ensure that you get as much rental money as possible. Read our 5 Steps to Conducting an Accurate Rental Market Analysis to figure out how much to charge for rent.
#2 Depreciation/Tax Deductions
Long-term rental properties can provide significant tax benefits. These benefits include the ability to deduct certain expenditures such as depreciation and mortgage interest. Property tax advantages are another significant benefit of the purchase and hold approach. These advantages aid property investors in lowering risks and increasing returns.
#3 Building Equity in the Property
By paying monthly rent on a standard rental property, your renter is effectively paying down your mortgage for you. This implies that your real estate investment property’s equity grows month after month! You can even utilize the rental money to cover the cost of your interest (which is tax deductible). This is why it’s critical to identify decent tenants who pay their rent on time.
#4 Real Estate Appreciation to Investing in Rental Properties
Despite the fact that the value of investment properties fluctuates, it’s reasonable to claim that a decent rental property in a suitable location will always increase in value over time. In the real estate investing world, this is referred to as appreciation. As a newbie investor, this is advantageous since you may profit from the growth in value of your investing in long term rentals.
#5 Leverage on the Investing In Long Term Rentals
Real estate investors can increase the number of properties they can acquire by borrowing money to buy rental homes. You may acquire a desirable piece of real estate with a little down payment and then use your existing equity to buy even more properties, increasing your profits.
Finding Profitable Investing in Rental Properties
#1 Choose the Right Neighbourhoods to Investing in Long Term Rentals
The best rental houses are usually found in strong working-class and middle-income areas. Investors seek out these neighbourhoods by looking for strong schools, nearby commercial centres, convenient transit, and communities where residents are concerned about their surroundings. There is a high demand for long-term rentals in these areas.
Don’t be enticed to purchase low-cost investment houses in undesirable areas! This will end up costing you money in the long term. In certain areas, there is chance of real estate appreciation, maintenance will be expensive, and your rental income will not likely increase over time. This helps to understand why “location” is such a crucial component in real estate investing.
#2 Locate Profitable Investment Properties
After you’ve decided on a location, the following step is to figure out what sort of investment property you want to acquire. Is it better to buy a single-family home, a multi-family home property, a townhouse, or a condominium? Many first-time investors struggle with deciding which form of property is the greatest investment. Experts agree, however, that first-time buyers should choose for single-family houses.
Furthermore, luxury rental homes should not be your first option of investment because it is advisable to start modest with long-term rentals. While there are certain advantages to investing in luxury residences, they are also quite expensive. Because these properties’ mortgage expenses, property taxes, and upkeep may exceed rental revenue, they might create negative cash flow, wiping out all of your profits. Again, single-family, entry-level rental homes are the best bet.
#3 Make Sure the Numbers Make Sense
The final stage in identifying successful conventional rentals is to examine the homes you’ve discovered. Every real estate investor should undertake a rental property study to ensure that the property he or she is considering will generate profit. To accomplish so, you’ll need to collect and compare information such as:
Interest, taxes, insurance, maintenance/repair, and professional services such as property management are all expenses. Monthly costs examine by real estate investors.
This might be the most important predictor of a property’s long-term profitability. Depending on your rental revenue and costs, it might be either positive or negative. Simply take the gross rental revenue and remove all of the expenditures that relate to your property to determine the cash flow.
This is the proportion of time that the investment property is unoccupied over the course of a year (has no tenants). The vacancy rate is often assessed as an expenditure and it ranges from 10% to 15% on average across the United States. This indicates that rental apartments remain unoccupied for around one month, therefore a greater vacancy rate is not a good indicator for long-term rentals.
This is a real estate indicator that shows the profitability of a property as a percentage. It shows how much money you’ll make compared to the market value of the property. The cap rate does not account for rental property financing since it implies the property acquired with cash.
Cash on Cash Return
Another indicator that reflects a property’s profitability is Cash on Cash Return, which takes into consideration your property financing strategy (all cash vs mortgage). As a result, it shows the amount of money you’ll make in relation to the overall amount of money you’ve put into the property.
As a real estate investor, you must calculate these figures for all of the investment properties you’ve identified, examine, and compare the findings to determine which is the most lucrative.
Getting Your First Long-Term Rental Property Financed
There are two ways to finance a buy-and-hold investment property in real estate. Investors have the option of paying cash or obtaining a mortgage. Of course, each sort of investing in long term rentals finance has advantages and downsides.
Option 1: Cash
The most obvious advantage of this financing approach is that it delivers instant rental revenue and cash flow. You can keep any cash flow because you don’t have a monthly mortgage payment. You won’t have to worry about a hefty mortgage payment to cover out-of-pocket expenses if the rental property is unoccupied. Furthermore, real estate investors that have cash on hand may negotiate a better bargain with the seller and close the sale faster. Paying all cash for an investment property has the obvious downside of depleting your financial reserves. After investing a significant sum in the purchase, you may find that you have very little money left over for monthly expenses.
Option 2: Mortgage Loans for Investing in Long Term Rentals
Most first-time property owners lack the necessary funds to purchase a rental property loans outright, so they take out a mortgage loan. This type of financing allows a real estate investor to purchase a property even if he or she does not have the entire amount in cash. Remember that one of the advantages of long-term leases is leverage? You can only use real estate to leverage if you’re buying it with a mortgage. Consider this: you’ll spend a modest sum of money to purchase a substantial real estate asset and reap all of the financial rewards!
Before looking for rental homes for sale, savvy real estate investors plan out their budget. We recommend doing the same with a new investment. Contact Kenady Fundings to discuss your funding possibilities.
The Bottom Line
Investing in Long term rentals have a lot of advantages for people who are just getting started in real estate investment. To be successful with this investment plan, you must accomplish a number of things. Finding the correct location, purchasing lucrative investment property, determining your financing and much more. Start reading our real estate investment blog to learn all you need to know about conventional rentals. It covers each topic you can think of to ensure you’re ready to get right into your profession.