What is a rental property?
A rental property is a residential or commercial real estate investment that the owner or landlord utilizes with the primary purpose of generating income.
It also means the process of buying properties and renting them out to tenants to make recurring profits over a long period of time. This can take several forms such as commercial, fixer-uppers, foreclosures, condos, single-family homes, and multi-family property.
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The rental property market in the US
The U.S Breau of Labor Statistics or BLS provides us with a glimpse of how huge the rental property in the United States. A report revealed that 44 million households are renters.
Apart from BLS report, the 2021 American Housing Survey provides an additional demographic profile of home renters. 39.3% of the 14,375,000 renters planning to move in the next 12 months said they planned to move to a different neighborhood in the same city, factoring in the good transport systems and schools as major reasons for their move.
While the U.S Census Brueau points out that the bigger share of homeowners earned a median annual household income of $78,000 compared to renters’ $41,000, the stats still show that investment in real estate rental is a lucrative business for property owners.
So, a landlord can decide to rent out their property instead of using it for personal use and in turn gets regular payments usually on a monthly or annual basis. As lucrative as real estate rentals is, you need to have a knowledge of the set-up process and the economic value you will get from investing in rental property.
If you investing in real estate rental properties is something you’ve been considering, it is important to know the types to know which one suits your goal.
Types of rental property
Rental property can basically be divided into categories: residential (tenants live in) and commercial rentals (for business purposes), but they can further be divided into six types:
1) Single-family homes (SFHs):
It is specifically designed for one family, they generally have enough space, and they do not share walls with other units. It is most sought-for among people who are well above the standard of living. They are capable of paying for utility bills themselves.
SFHs also eliminate the issue of disputes with other tenants who share the same walls. There is privacy.
2) Multi-family real estate:
This has more than one unit. Investors in multi-family properties are able to scale their profits quicker than SFHs. Return on Investment is higher than
3) Foreclosures
If a previous owner of a property failed to fulfil their mortgage payments, the financial institution that funds the property comes in to take over such property, this kind of property is called foreclosure. They are bank-owned properties.
If you’re looking to buy distressed property below market value, foreclosed properties might be good for you. Banks are always quick to sell foreclosed properties for them to recoup their loan amount.
While you may buy at a cheaper price, it also has its challenge: you must be ready to spend some monies to maintenance if it’s property that has been abandoned for a longer period of time.
4) Commercial property
Commercial properties are designed for commercial use like office buildings, warehouse to store inventory, hair salons, restaurants, grocery stores etc.
The renters pay the bills including maintenance of the building and pay property taxes, depending on the agreement of the lease. But commercial real estate requires a strategic location to suit business needs.
5) Fixer-uppers
This kind of rental property also requires some level of repair by the homeowners to get a great value from rent.
6) Condominiums
Condominiums, condos for short, are units in multi-unit buildings. Each of the units is owned by separately by an individual, but amenities like pool, tennis court are shared among owners usually provided and jointly maintained by the homeowner’s association (HOA).
So, which of the above property rentals is best for you? You have to decide. You pocket will be a major determinant. This leads us to the process of setting up a rental property business.
How to start investing in property rental
You’ve decided on the type of real estate rental you want, fro market research to tenant acquisition, here is the step-by-step process to start a property rental:
Market research and location analysis:
Your first task as a prospective real estate investor is to conduct market research. For instance, the dynamics of local property in the United Kingdom is different from the local property market in the United States.
The key factors to consider are:
- demand for rentals,
- Potential for growth
- Steady stream of tenants
- Schools
- average rental rates,
- Amenities
- Location of industries (if you’re considering investing in commercial rental )
- long-term property value trends, and
- Future development plans
Property acquisition:
Have you found the promising locations and completed due diligence (DD)? It’s time to acquire the property. This could mean buying an existing property or purchasing land and building from the ground up.
Factors that should guide you at this stage include:
- Clear budget
- Financial plan, and
- Cost of renovations, if you’re purchasing an existing one, say foreclosure
Property preparation and renovation:
After purchasing your property, you may need to prepare or renovate it to make it attractive to potential tenants. This could include anything from a fresh coat of paint to a complete remodel. Keep your target tenant in mind during this process.
For example, families might appreciate a well-maintained garden, while young professionals could be looking for a modern, stylish interior. Your target tenant should guide your decision-making.
Setting rent and security deposits:
Deciding on the rent requires a careful balancing act. If you set the rent too high (over-priced), you may struggle to find tenants; if you set it too low, your return on your investment may be affected.
In balancing this, you have to review the local market rates for similar properties to determine a competitive yet profitable rental price.
Like we earlier pointed out, rental price in locations and countries are not the same. For instance, there is a slight different rent in London and Washington D.C., according to data on Numbeo:
While 1 bedroom apartment in the City centre in London is $2,642.77 or £2,071.58, it is $2,606.67 or £2,043.29 in the US capital.
3 bedrooms apartment outside the centre in Washington D.C is 3,884.09USD or £3,044.62, it is -16.8 %, in the UK’s capital, where it cost £2,532.60 or $3,230.89
When you’re entering a new market, make sure you have valuable data on the rent to guide the price you set.
Don’t forget that security deposits are also important. They provide a financial safety net in case of damage to the property or missed rent payments. Again, local laws and typical practices should guide the amount you request for this deposit.
Legal aspects:
You must understand and comply with all relevant laws and regulations. These might include building codes, health and safety standards, and local ordinances. If you plan to invest in California real estate, you have to check the Building Standards Commission on the official government website.
Rental agreements should be legally sound and protect both parties’ rights. It’s wise to seek legal advice to ensure you’re fully compliant.
Marketing and tenant acquisition:
Finding tenants for your property involves marketing your property effectively to attract interest, then screening potential tenants to ensure they’re reliable and financially stable. You may use online listings, print advertisements, and real estate agents can all be part of your marketing strategy.
Benefits of investing in rental property
From steady income stream to property value appreciation, here are the benefits of investing in real estate rentals:
1) Steady income stream:
The most popular advantage of investing in property rental is the steady income stream they provide. Rent payments can cover your property’s costs and even generate a nice profit. This reliable income is particularly attractive for investors looking for steady cash flow.
2) Property value appreciation:
The value of properties hardly depreciates unless there is an effect of war or collapse of such property; property values tend to rise. Well-chosen real estate can appreciate, adding to your wealth. Even as you earn income from rent, you could also be sitting on a steadily appreciating asset.
3) Tax benefits:
Many countries offer tax benefits to real estate investors. If the US is your choice and you would like to enjoy lower property tax, you might want to choose states like Alabama, Hawaii, Colorado, Utah and South Carolina.
4) Diversification of investment portfolio:
Investing in property rental can help diversify your investment portfolio. Real estate often moves independently of the stock market, which can help protect your wealth during times of market volatility.
Potential challenges of investing in real estate rentals and Solutions
We’ve mentioned that property rental can be rewarding, they’re not without their challenges and problems. Here are some potential problems and how to overcome:
Property damage:
Tenants might not always treat your property with care. It’s crucial to conduct regular inspections and address any damage immediately.
Solution: Security deposits can also help cover these costs.
Vacancies:
An empty property doesn’t generate income.
Solution: To minimize vacancies, price your property competitively, maintain it well, and market it effectively.
Legal issues:
Non-compliance with laws can lead to fines or lawsuits. To avoid this, ensure you fully understand your legal obligations.
Solution: Consider hiring a lawyer or property management company if needed.
Difficult tenants:
Late payments, disputes, or problematic behavior can cause stress.
Solution: A thorough tenant screening process can help prevent these issues.
Conclusion
Navigating the world of rental property is indeed a challenging task, but the potential rewards are worth it. By following the setup process we’ve outlined and understanding the benefits, you can enjoy the benefits of investing in rental property.