Being able to buy rental real estate is a dream for many as a way to earn passive income. Although you can become a millionaire, through diligent saving and stock market investing, real estate is a timeless way to make wealth and diversify your investment portfolio.
After all, people will always need a place to sleep and work. If they can’t afford to buy their own house, they need to rent from a landlord (you!).
While owning rental property doesn’t guarantee you’ll become a millionaire, and you don’t need to own rental property to become one either, there are many benefits of owning rental property.
There are many different ways to buy rental real estate. In some cases, you don’t even need a large fortune to buy your first property!
Why Buy Rental Real Estate
Being the richest man in the world for his generation, Andrew Carnegie once said:
Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.
Although a lot has happened in the world in the 100 years since Andrew Carnegie made this quote, one thing remains constant, you can earn a steady income by investing in rental property in your working or retirement years.
Rental Real Estate Can Be “Recession Proof”
As home mortgage interest rates increase, more people may decide to remain renters instead of homeowners. It can be more affordable or convenient to pay rent instead of buying a home.
Another reason why real estate is a popular investment is that it’s a tangible asset that you can physically see and feel.
Despite living in a digital world, there’s still something to be said about owning physical assets that you know exist. And, people always need a place to live so picking the right rental market means you should always have a steady supply of prospective tenants.
While property values fluctuate, home prices generally appreciate long-term. You can sell your property when you’re ready to downsize or even pass the business onto your children.
The same can’t always be said for stock investments which can be more volatile. If a company falls out of favor with investors or the broad market corrects, your entire portfolio shrinks in value. With rental real estate, you can still earn a steady paycheck even if your 401k looks more like a 201k.
You Have Multiple Investment Options
There are many different avenues to buy rental property such as:
- Single-family homes
- Multifamily dwellings (Duplexes, Apartments)
- Mobile homes
- Commercial real estate (Office buildings, strip malls)
- Industrial real estate
For the average DIY investor, you might decide to invest in the residential real estate because there are fewer barriers to entry and it’s more cost-effective.
Where to Buy Rental Real Estate
There are lots of avenues to buy rental estate as a solo investor or as a group. With a few of these suggestions, you can even buy rental real estate without the full-time commitment required of a traditional landlord.
1. Your Own Home
The first place to start might be your current dwelling. You can rent your finished basement as one idea. Even if you need to spend a few thousand dollars to add a private living space, it’s still cheaper than buying a second house.
If you’re planning on moving to a new house, you can rent out your current house. By keeping your old house, the monthly rent can pay the mortgage for your new house and your day job income can be saved for your other financial goals.
Depending on where you live, you can also turn your house into a vacation rental. As an Airbnb host, you can potentially earn more from travelers than full-time renters. And, Airbnb rentals can also be less stressful depending on the types of tenants that are interested in your property too.
Tip: Some beginner landlords buy a duplex unit and rent each unit for the same amount of the monthly mortgage payment. If your monthly mortgage payment is $500, you charge each tenant $500. That way, you still break even when only one side is occupied. Or, you can live in the other part and have your tenant pay the entire mortgage amount!
RealtyShares is another popular crowdfunded real estate investment option. You only need $5,000 to invest, but this platform is only available for accredited investors with a high net worth. If you want more investment flexibility, you should pursue RealtyShares if you qualify as an investor. The investment fees are also lower which means you get to keep more of your investment income.
With RealtyShares, you have the opportunity to invest in individual residential and commercial properties. Fundrise only lets you invest in a basket of properties that the eREIT team picks out. If you don’t have the time or expertise to vet various rental properties, eREITs are a handy option, but you can potentially earn more by handpicking your own deals.
Tip: Crowdfunded real estate dividends are taxed as ordinary income (not capital gains) so you might consider opening a RealtyShares IRA to minimize your taxable income.
Accredited investors can also browse PeerStreet to buy rental real estate too. While it might take three to five years to recoup your entire investment with other crowdfunded real estate properties, PeerStreet projects only take 18 to 24 months to mature. You collect a monthly interest payment and can get your initial investment balance back within two years.
PeerStreet also has an automated investment tool that can pick the best real estate deals for you too. You still invest in individual projects to spend less time property hunting and more time earning passive income.
When somebody mentions the phrase rental property, you immediately think you need to invest at least $150,000 at once to become a landlord. Fundrise is an online alternative that makes it possible for anybody to own rental property and you only need $500 to invest in rental property. And, you don’t have to handle the responsibilities of being a landlord and still enjoy the benefits of being a private real estate investor.
Investing with Fundrise can also be less risky because your money is invested in an eREIT (Electonic Real Estate Investment Trust) that gives you a stake in residential and commercial real estate projects located across the United States so you can earn passive income every month. Annual historical returns range between 8% and 12% depending on the investment portfolio you choose.
When you signup for their Starter Portfolio, Fundrise divides your initial investment into three separate eREITs:
- East Coast
- West Coast
Each REIT invests in properties in different geographic areas of the United States. When you invest more than $1,000, you have the opportunity to invest in advanced plans that can focus on specific real estate markets like Washington D.C. or Los Angeles or investing in properties that Fundrise plans to sell once the property value appreciates.
Read our Fundrise review to learn more about how crowdfunded real estate investing works.
Roofstock is a company that was started in 2012 to make it easier for investors to find single-family rental properties to invest in. Roofstock has a thorough process to vet homes of high quality.
It’s free to join Roofstock and view homes on the platform, however you will need a sizeable down payment to invest in most of the properties. The account fees are low with only a 0.50% setup fee, which makes it attractive for investors who want to avoid wasting money on fees.
6. Ask Your Realtor
Getting a real estate license can give an inside edge on finding potential rental properties, but you can ask a realtor if rental properties are going to be your side hustle.
Here’s why, realtors have exclusive access to the MLS Listings and private realtor notes that let them quickly vet properties. Realtors might also have early access to leads that aren’t listed on the MLS yet. Sometimes, you need to think like a seller when you try to buy rental real estate. Sellers will try to make private deals to avoid the time involved to create an MLS listing.
Every publicly listed house has an MLS sheet that displays some of the following information:
- Asking price
- Tax appraisal value
- Year built
- Any special features or amenities
- Brief history of the house (i.e., Repossessed, Condemned, Flood Damage, etc.)
A good realtor can also quickly tell you the best neighborhoods to look for properties in and a fair price on a prospective property. Sometimes, a single conversation with a local expert is your best option to expedite the search process.
The old-school way to finding local rental property is browsing the MLS Listings with your family realtor. This option is still highly-effective but you can also do your own detective work with Zillow so you don’t consume your realtor’s valuable time.
Zillow lets you find houses for sale by combing the MLS listings for free. You can filter your local listings by certain amenities or geographic features such as:
- Number of bedrooms or bathrooms
- Home type
- Lot size
- Local schools
The free property search websites cater more to homebuyers looking for their next residency, but you can still use the same information to find your ideal property.
Trulia is owned by Zillow, but you still might prefer their interface. When you’re ready to begin renting, you can also post your rental listing to reach a wider audience of potential renters. Like Zillow, it’s also free to browse the active listings.
Another online real estate marketplace to try is Redfin which is a separate entity from the public MLS listings. Although these properties might also be listed on the local MLS service, it can be easier to find them on Redfin. Some sellers might be more motivated to use Redfin because the selling fees are lower. You never know where you’ll find the best deal so keep Redfin in mind.
Private sellers also like Craigslist because it’s free to list when you’re selling a For Sale By Owner property. You can browse several different categories in the “Housing” menu. You’ll probably have the most success in the Real Estate for Sale option, but you might also find a deal if you can trade tangible assets with the Housing Swap section too.
Another place to try finding deals is Facebook. Join your local buy and sell groups as people will sell their houses and land tracts in addition to lower-priced items like cars, furniture, and clothing. The selection won’t be as wide as the other home listing search engines, but it only takes one listing to find the right investment property.
Find out all the other ways you can make money with Facebook too.
12. Your Local Newspaper
Most investment opportunities are found online, but you can still check your local newspaper classifieds for some leads. If nothing else, you can get the scoop on what’s going on in your local community to spot the trending neighborhoods and the parts of town to avoid.
13. Walk Your Neighborhoods
Many real estate investors also find their best deals by walking local neighborhoods and talking to neighbors. Not only do you get paid to exercise, you can find a house that hasn’t been brought to the market yet. Some of the most successful investors and entrepreneurs “strike gold” because they identify an opportunity before everybody else.
Once a house goes to market, it’s accessible to any realtor or aspiring landlord. The asking price can be significantly higher because there’s more competition among the buyers.
When you walk the neighborhood, look for houses that look vacant or in disrepair. You can knock on the door and see if the owner currently lives in the house. If so, you can ask if they’re interested in selling. If the house is vacant, try searching for property deeds or asking the neighbors if they have any contact information for the owner. Sometimes, persistence is key and the person who asks first gets the deal.
14. Form a Real Estate Investment Group
Depending on your local connections, you can also try forming a real estate investment group. Instead of buying a rental property all by yourself, you can split the purchase price with other investors. Although you won’t earn as much rental income every month, it can mean the difference between earning passive income or having your money continue to sit in a savings account.
Besides being able to invest less money, you can also use the other group members experience to ensure you buy the best rental property. Those skills might be business knowledge or performing DIY repairs so you’re not using your rental income to pay contractors.
15. Invest in a REIT ETF or Mutual Fund
When owning your very own rental property seems like a large undertaking or you still need instant access to your investment, you should consider investing in a publicly-traded REIT (Real Estate Investment Trust). Although REIT investments have the lowest income potential, they are the least expensive and time-consuming option.
Not to be confused with an eREIT offered by Fundrise or Rich Uncles, REIT ETFs, mutual funds, and individual stocks can be purchased with your regular investment account.
REIT stocks and ETFs can help you invest in the following rental properties:
- Cell phone towers
For starters, you might invest in a REIT index fund like VNQ or SCHH to minimize your investment risk and get instant exposure to multiple real estate sectors.
One advantage of regular REITs is their liquidity. Although you should plan to hold long-term, you can buy today and sell tomorrow if you absolutely have to because you invest in the real estate companies who collect rent from their tenants. By nature, investment property is highly illiquid and it can take several years to sell your initial investment back.
Two downsides of public REITs is that your investment value is based on the current stock price and the dividends are smaller than private investments. With private platforms like Fundrise and RealtyShares, you can expect to earn an 8% to 12% dividend rate. Public REITs typically earn a dividend of 5% or 6%, but those gains can be erased if the share price declines more than the dividend. If you buy a REIT at $100 a share and it drops in value 10% and the dividend is only 5%, you’ll sell your shares for a loss unless the share price recovers.
Avoid investing fees and invest in REITs for free with a free investing app.
The Best Cities to Buy Rental Real Estate
Your best city to buy rental real estate might be your hometown because you’re a local expert. You already know the best neighborhoods and schools, incoming employers, local rules and regulations, and know a fair real estate price. If you feel comfortable with buying rental property in a different state or time zone, you can even consider a few of these cities that are landlord-friendly.
In most cases, you will be better off buying a single family home in a good neighborhood. The following recommendations are a list of cities that can be excellent opportunities for renting to single-family homes.
These cities share several common tendencies:
- Growing population
- Strong labor market with several large employers
- Large metropolitan areas
- Reasonable home prices
You will have an easier time finding tenants so your property doesn’t fit vacant. While some big cities have expensive home values, these markets still make it possible to have a high cap rate.
Maybe you will only use the characteristics of these cities to find potential properties in similar cities near you. Also, remember to be patient when buying your first property. Using the suggestions in this article can help you pick a profitable property.
Orlando has the 4th largest real estate market in the nation and you can still buy a decent property for less than $200,000. This tourist hotspot is also attracting many full-time residents too. Because of the rapid population growth and reasonable real estate prices, Orlando is a top pick for any investor.
Due to the expansion of the Panama Canal, the Port of Jacksonville has recently expanded its footprint to handle the anticipated influx in maritime traffic. Jacksonville is also home to four S&P 500 company headquarters and a thriving medical community. With a reasonable cost of living and an above average rental rate, there’s a lot to like about this coastal city.
Some experts estimate that 100 new people move to Nashville a day! No longer a sleepy southern town, Nashville is home to several college campuses and several large employers in the medical and automotive sectors.
Three hours from Chicago, Indianapolis has an affordable real estate market and a thriving employment scene in the bioscience, technology, and transportation sectors. You can invest in America’s heartland with rental property in this metro area.
Houston is the fourth largest city in the United States and it’s also home to NASA and many energy and health-related companies. Since 2010, it’s also estimated that Houston’s population has grown 10% while the entire U.S. population only grew approximately 4% in the same period. Because not every new resident is going to buy a home, this population boom can be a landlord’s dream.
Grand Rapids, MI
The state of Michigan has a low corporate tax and a reasonable cost of living for the midwestern region. With several large furniture and medical employers and a $175,000 median home price, there’s a lot to like about Grand Rapids.
The Phoenix, Arizona metro area has also seen impressive growth and a bright employment outlook lately. One place you might begin property hunting is the town of Mesa. Although the median home price is approximately $233,000, it’s less than the average Phoenix metro median price of $253,000.
Boston has the most expensive home prices on this list, but the city is thriving. The employment outlook is positive and home prices are projected to increase. You might not be able to afford to enter the Boston rental market, but it’s important to remember that good property can be found at any price point when you can identify a city with a flourishing population and employment outlook.
Tips to Successfully Buy Rental Real Estate
Every real estate investor has their own “success formula,” but there are several common factors for any real estate market in the world.
Location, Location, Location
Probably the most important tip is the location of your rental property. As a general rule of thumb, ask yourself if you would be happy as a tenant if the roles were reversed. If not, keep on looking for the next opportunity.
It’s almost always better to get the worst house in a good neighborhood than the best house in a bad neighborhood. You can charge higher rent and find better tenants by owning property in the desirable parts of town. Bad tenants can erase your profit potential if they leave your place a mess when they move out. Besides the potential monetary loss, you will also have more headaches too.
Finally, if you decide to sell the property in the future, your rental property can depreciate in value if the bad location worsens with time.
Identify Your Target Renter
Each rental property is going to attract different types of tenants. For example, a family with school-aged children will want to rent in a neighborhood with access to good schools. College students are more likely to rent a small apartment near a college campus. Affluent professionals are more likely to rent a property with an above average rent price that families earning the median income can’t afford.
You need to decide which type of tenant you feel comfortable occupying your property, and you should look for properties that fit that mold. Just like you won’t invest in a stock with a risky business model, you want to avoid risky tenants that might skip rental payments or cause excess damage to your property.
Compare Rent Prices for Similar Properties
You also need to compare rent prices for similar properties nearby. For example, you can’t charge San Francisco rates for a similar property in Toledo, Ohio. If you’re too high, your property will remain vacant and you don’t earn rental income. Also, you need to make sure the rent pays for the following expenses:
- Property taxes
- Rental property mortgage payment
- Planned repairs
Rental properties are only a wise investment when profits exceed costs over the long run. Crunch these numbers before you buy to make sure you can turn a profit.
Calculate Your Cap Rate
Possibly the most important number in rental real estate is the Cap Rate. The Cap Rate compares your anticipated income to your planned expenses. You should strive to have the highest cap rate possible to earn the most profit. Just like you might invest in stocks that pay a 5% annual dividend, you might only consider buying rental properties with a cap rate of at least 8% to provide a financial cushion for unexpected repairs or vacancies.
Here’s how to calculate your cap rate:
- Calculate your planned annual income and expenses
- Subtract the annual expenses from your annual income to calculate your net income
- Divide your net income by the purchase price
- Multiply the number by 100
- This answer is your cap rate percentage
As an example, your cap rate is 17.1% if your net income is $12,000 with a purchase price of $70,000.
You might not earn a profit initially depending on the upfront costs to buy your rental property. Maybe you’re planning on buying a fixer-upper that you want to rent. Instead of paying contractors to do the work, complete as much of the required work yourself. Maybe it’s installing new flooring, pressure washing the exterior, or painting the walls.
By spending your time and utilizing your handy skills, that’s thousands of dollars you save to maximize your cap rate.
When you want to invest in rental property, it’s usually better for first-time landlords to avoid fixer uppers. Buying a move-in ready rental property (at the right price) is a stressless way to begin earning rental income ASAP.
Maximizing Your Rental Property Income
Buying the right rental property is one part to being a successful real estate investor. The second challenge is keeping your investment property expenses to a minimum. This is why it’s so important to perform your due diligence and pick a property that shares some of these characteristics:
- Low property taxes
- Minimal initial repairs
- Avoid lavish property upgrades
- Don’t get caught in a bidding war
- Short commute time from your home
You need to factor all of the above costs into your tenant’s rent price, especially if you borrowed money to buy the property. Your monthly rent needs to at least cover the monthly mortgage payment.
Don’t forget that time is just as valuable as money. For convenience, you might try to find a property in the same neighborhood so you can quickly address any trouble calls. Having to drive to a different city–or even hiring a property manager for long-distance properties–might not be worth the hassle if you scoop up a rental property for a discount.
Charge Enough Rent to Cover the Monthly Bills
A general rule of thumb is to set your monthly rent rate at 1% of the property value. On a $100,000 house, you would charge $1,000 a month with this guideline, however your local market might only support a smaller percentage. Go on Craigslist to compare similar rental rates to get a ballpark idea of your income potential.
Before you start taking applications for your first tenant, accurately calculate the property taxes, insurance, mortgage payment, and any additional monthly expenses to find your breakeven price point. To cover future repairs and rental income taxes, you should try to pocket up to 6% each month in profit to cover the months you have expensive repairs or you’re in between tenants.
This is called the “Cap Rate” and you should always calculate it before you buy any rental property.
Track Your Tax Deductions
Because your rental income is taxable, you need to keep a written or electronic log of your investment-related expenses. Intuit Quickbooks will soon be your best friend if you need to track invoices and expenses in real-time and avoid a stressful tax filing experience.
Although you can talk with your tax professional for tailored advice, you can generally deduct the following expenses:
- Auto miles driven
- Cleaning and maintenance fees
- Homeowner’s Association Fees
- Mortage interest paid
- Property management fees
- Property taxes
You can also deduct utilities that the tenant doesn’t pay for. The deduction limits can depend on what type of rental property you own. If you occupy a portion of the house or it’s your vacation home, you will need to prorate the deductions.
If your rental property is a separate parcel that you don’t live on or vacation at, you can usually deduct the entire expense amount.
Residential rental properties are the most common and affordable way to buy rental property. How and where you buy your rental property are two of the most important factors in determining your purchase price and how much rent you can charge. Whether you want to be a sole investor and buy a house locally or invest with an online platform, being a landlord is a more realistic possibility than you might realize.