If you’re considering starting a rental property business, you might feel overwhelmed by the prospect of turning your investment property into a profitable endeavor. It’s certainly a hefty initial undertaking, but when you consider that over 90% of the largest 100 U.S. cities experienced a rent increase from 2018 to 2020, the benefits of a passive income become incredibly appealing.
Like any other entrepreneurial pursuit, starting a rental property business takes time and effort. Having a clear plan of action before you start will help you maximize the return on your investment—both in terms of time and money.
Understanding how to start a rental business can be done by breaking the process down into a few basic steps.
Whether you hope to include 1 or 50 rental properties in your portfolio, you’ll need to make a few key steps to make your business efficient, sophisticated, and, most importantly, profitable. As you begin the exciting process of considering how to start a rental business, keep the following tips in mind.
#1 Make a Business Plan
A major draw of owning a rental property business is the fact that, if done properly, your investments can provide a consistent source of passive income. However, achieving this coveted source of cash flow requires owners to be anything but passive in the early stages of starting their business.
Treating your rental property business the same way you’d treat any other venture is the key to success. You’ll need organization, foresight, and careful planning.
Take a look at these essential steps:
Find the Perfect Property
The rental property you own is going to act as the backbone for your entire business. This means that finding the perfect investment opportunity(s) is a crucial part of your overall success.
When purchasing your rental property, keep the following in mind:
- Neighborhood Demographics – Understanding the demographics in the area where you hope to buy a property is more important than just wanting to get to know your neighbors. Do your research and seek out markets where renting is advantageous. Understanding the neighborhood demographics can also help you find a fit tenant that meets your needs as a property owner.
- Renovations, Repairs, Rentability – If the property you’re considering purchasing needs significant renovations or repairs, you need to factor this into your overall financial bottom line. Unlike a home where you plan to occupy yourself, issues with rental properties have to be addressed to make them attractive to renters.
- Stick to Your Budget – There are a few similarities between purchasing your own home and purchasing a rental property. Being tempted to buy more houses than you can afford is one of them. Sticking to your budget will help keep your business on track from the start.
Strategize Your Financing
Once you’ve found the perfect property, you need to figure out the smartest way to finance it. How to purchase your property is a big decision that’s based on a variety of factors. Even if you already have a purchasing plan in mind, it never hurts to consider all your options. It may also be a good idea to take a crash course in understanding how to value a rental property before buying. This can help guide you on your first rental property purchase and steer you away from making a big financial mistake.
Consider the pros and cons of paying with cash versus taking out a mortgage:
- Buying with Cash – If you have the cash to purchase your home outright, this can sometimes be a good option. You’ll likely be able to close the deal more quickly, and doing so means you don’t have to go through the process of getting a mortgage. Additionally, you can mitigate closing costs with a cash payout.
- Mortgages – This is where knowing all the facts and doing abundant due diligence is crucial because your mortgage can play a huge role in your overall profits from your property. Done correctly, using leverage can increase your cash flow because the benefits of paying for your investment (and paying taxes) over time, can outweigh the added interest you’ll accrue. Additionally, with 30-year fixed mortgage rates hovering around 3.14%, now [July 29, 2020], might be the perfect time to buy.
Bonus Tip: Sometimes, getting preapproved on a mortgage is a fantastic way to identify where you stand in the lending market. Not only will your budget be intact, but you’ll also know how much you’ll be able to borrow, further narrowing down your first rental property choices.
Crunch the Numbers
Another important part of the rental property business equation is how much income you can generate. Determining this requires having thorough knowledge regarding the financial inputs and outputs of your property.
As you calculate how much you’ll need to plan to input into the property side of your business, take into account the following:
- Mortgage payments
- Insurance premiums
- Property taxes
Once you determine how much you can expect to put into your property on a monthly basis, you can begin calculating how much you’re going to need to get out of it in order to generate income from your real estate investment.
Determining the rent on your property is a delicate process because you want it to be high enough to actually make you money, but low enough to stay competitive. Remember, if your rent is too high and it results in vacancies, that means a considerable loss of income that likely outweighs setting the rent at a slightly lower rate.
Don’t forget the added benefits that do come with your real estate investment. Owning real estate comes with many rental property tax deductions that you can use to your advantage!
#2 Become a ‘Jack of All Trades’
As a business owner, you’re going to need to get comfortable with all aspects of your business. From administration to marketing, to ensuring your company is abiding by the law, starting a rental property business means more than just buying and renting properties.
Register Your Company
If you’re starting a company for the first time, handling the legal aspects of your business can be daunting. However, in order to protect yourself and your business, it’s important that you stay on top of these kinds of issues.
Running your rental business as a sole proprietor means you take on the risk associated with the property—and it’s tenants. Incorporating your business takes your personal liability out of the equation, and protects your personal assets. Registering as an LLC isn’t as difficult as you might imagine, and doing so early mitigates your personal risk.
Marketing is an important aspect of any successful business. Effectively marketing your properties will help you avoid vacancies and find great tenants. Like many investments, how much effort you put into marketing will determine how much you get out of it.
As you begin to map out your marketing strategy, consider using two main methods:
- Conventional Real Estate Marketing – Old-fashioned as it may be, there’s still merit in putting up a “for rent” sign in the yard. Tried and true methods like signage, flyers, and word of mouth are old standbys for a reason. These methods are inexpensive and are great for capturing the business of locals and expanding your reputation as a landlord in the community.
- Marketing for the Modern World – Using more modern approaches comes with its own set of advantages. Relying on social media, listing sites, and online ads will expand your reach and allow you to tap into markets you otherwise wouldn’t have access to. Consider offering video tours and virtual showings to keep up with the times. If you are considering having your property serve as a vacation rental, choosing a marketing strategy that centers online can help draw in short-term renters easier.
As a general rule, using a combination of the two strategies above is a good way to diversify your marketing efforts. Keep in mind that if you don’t personally have the bandwidth to tackle marketing, Great Jones offers marketing as part of our property management services. For more marketing and advertising tips, check out our guide on how to advertise a rental property.
#3 Hire A Property Management Company
Part of understanding how to start a rental business in the most effective, profitable way is knowing just how much time you’re willing to invest in your business once it’s up and running.
At the end of the day, owning a rental business means you are a landlord, but that doesn’t mean you have to commit to handling repairs, collecting rent, and dealing with tenant complaints if you don’t want to.
Hiring a property management company can take some of the weight off of your shoulders. Having a strong, proactive team like Great Jones behind you means you can dedicate your efforts to the things that are the most important.
It will also help ensure that your passive sources of income are exactly that—passive.
At Great Jones, we understand that the last thing you want to do is manage your management company. As a business owner, you already have enough on your plate.
It’s Time to Get Down to Business
Starting a rental property business is a big commitment. Taking on the responsibilities of a business owner requires a lot of hard work, but if you keep the tips above in mind, you’re sure to feel prepared, well-informed, and ready to start your business. Don’t forget—you aren’t alone.
Experts like the team at Great Jones are here to help you maximize your business’s potential. Whether you need property management in Fort Myers or property management in Raleigh, NC, we’ll help you make your investment a profitable one.
Mash Advisor. Buying a Rental Property: Cash or Mortgage?. https://www.mashvisor.com/blog/buying-an-investment-property-cash-mortgage/
Become a Pro Landlord. How to Start a Rental Property from Scratch. http://becomeprolandlord.com/start-rental-property-business/
Mash Advisor. How to Start a Rental Property Business Like a Pro. https://www.fortunebuilders.com/rental-property/
Bank Rate: Ten Tips for Buying a Rental Property. https://www.bankrate.com/investing/buying-income-property/
Bankrate. Today’s Mortgage Rates, July 29, 2020 | Key rate drops.
Forbes. The Benefits of Buying a Home With Cash.
Apartment List. Apartment Last National Rent Report.