If you want to learn how to invest in rental property, you’ve come to the right place. Investing in real estate has long been considered a strategy for building wealth. With a strong record of reliability and consistency, real estate can deliver steady rental income and long-term appreciation.
Owning a rental property also can provide other benefits, including portfolio diversification, tax deductions and a potential hedge against inflation. You can decide whether investing in rental property is for you by understanding what rental property is, the types of properties available and how to invest in rental property.
Understanding Rental Property Investment
Rental property investment is buying residential or commercial real estate with the intent to receive rent payments. Real estate investing in the right place at the right price can be an opportunity for you to maximize your income.
If you have experience buying your primary residence, you’re ahead of the game. However, there are differences to consider when buying rental properties:
- Assessing the market: Is now the right time to buy or later?
- Scouting the location: Find a property in a high-demand area.
- Choosing the type of property: Understand what your responsibilities will be.
- Getting financing: You want cost-effective financing that you can handle.
Investing in rental property makes you a landlord. That puts you in charge of marketing the property and screening tenants, collecting rent, keeping up the property, repairing things that break and paying property taxes. If that’s not what you want to do, you can hire a property manager. Either way, you must consider these expenses when choosing a property.
Types of Rental Properties
When making a property investment, you can choose from several different types of property. They all come with different levels of responsibility and return profiles.
- Single-family homes: A property designed for one household
- Multi-family units: Duplexes, triplexes and quadplexes with separate entrances
- Apartment complexes: A group of buildings with multiple living units
- Vacation rentals: Short-term rentals (think Airbnb, Vrbo and the like)
- Commercial properties: Office space for businesses to rent
The type of properties you choose for your real estate investments can affect the returns you see from the properties, your responsibilities in managing the properties and the long-term profitability of the properties.
Researching and understanding the differences among rental property types can help you decide whether to invest in rental properties and how you want to manage them.
How to Invest in a Rental Property
You have many ways to invest in rental property. While real estate investing can be expensive and time-consuming, it doesn’t have to be. The choice of investing in a rental property depends on how involved you want to be.
Buy and Hold
The strategy of buy and hold is pretty much what it says: You purchase a rental property and hold onto it long-term, renting it out and building equity in the property as you use the rent to pay down the mortgage and the property appreciates. Here are the core principles of a buy-and-hold strategy:
- Long-term perspective on growth and wealth-building
- Consistent income from renting the property
- Property appreciation over time
The basis of buy and hold is to have patience and allow your rental property to grow your wealth over time.
House Flipping
House flipping, or fix and flip or rehab flipping, is at the opposite end of the continuum from a buy-and-hold strategy. With house flipping, you purchase a property — typically one that’s under the market and needs repairs — and add value by making improvements. You then sell the property for more than what you paid for it to make a profit. It’s a short-term real estate strategy to make a quick gain.
Invest in REITs
Real estate investment trusts (REITs) are companies that own, operate and finance income-generating residential and commercial properties. A REIT is an alternative way to invest in rental property because it allows you to participate in the real estate market without directly owning or managing any property.
REITs are required to pay out 90% of their taxable income to shareholders. If you’re looking for steady income, REITs pay periodic dividends from rent and appreciation or the interest earned on mortgages.
You can buy many REITs on the public market, and this makes it easier to sell if you choose. However, a non-traded REIT isn’t publicly available on the open market, making it illiquid or harder to sell if you need cash quickly.
Invest in ETFs or Mutual Funds
Real estate exchange-traded funds (ETFs) and real estate mutual funds are two ways for you to add real estate to your investment portfolio without having to buy individual properties.
Real estate ETFs typically track a basket of real estate-related holdings, such as a REIT, and are traded like stocks on an exchange. Real estate mutual funds pool money from multiple investors to buy a diversified real estate portfolio that may include residential, commercial and industrial properties.
You must open an account with a broker to invest in real estate ETFs or mutual funds.
Choose Your Path to Investing in Rental Property
Real estate is considered one of the most stable investments. It has been credited with helping many investors build wealth. Now that you know how to invest in rental property, you can decide whether real estate investing is for you. Then you can choose your path for adding real estate to your investment portfolio.
Frequently Asked Questions
Is it worth investing in rental property?
Investing in rental property can be profitable from rental income and property appreciation, and you may have tax advantages from deducting rental expenses such as mortgage interest, property taxes, depreciation, operating expenses and repairs.
However, investing in rental property is not without risks (tenant issues, vacancies, market downturns, etc. ). Whether it is worth it for you depends on market conditions and your financial situation.
What is the 2% rule for rental investments?
The 2% rule is a guideline for buying rental property that gives you a quick check on whether an investment property might be profitable. It works the same as the 1% rule often used in real estate, but it is more aggressive. It says the monthly rent you charge should be equal to or exceed 2% of the price you paid for the property.
How many rental properties to make $5000 a month?
The number of properties needed to make $5,000 per month depends on your rental strategy, but you can use two general guidelines — the 1% rule that income should be at least 1% of the property purchase price, and the 50% rule for how much is needed to cover expenses (property taxes, maintenance, insurance and repairs).
For example, if you buy a property at $200,000, you might expect $2,000 per month in rent, and if 50% of that income goes toward expenses, you would be left with $1,000 per month in income, meaning you would need five rental properties at those figures to earn $5,000.
