Investing in a long-term rental property can be a great way to generate passive income and build wealth
The following article has been provided by RCN Capital.
Investing in a long-term rental property can be a great way to generate passive income and build wealth over time. However, this passive income doesn’t come automatically and there are strategies out there that can help investors achieve profitability at a much quicker rate.
With the state of the current market, a lot of investors are gravitating towards the long-term rental space. There is a level of unpredictability regarding other investment strategies at the moment with rising rates and inflation, but long-term rental properties have stabilized many investor portfolios around the country throughout the past year. If investors choose this path as well here are some tips to help maximize that return on investment.
Location, location, location
Of course, the right location matters when investing in long-term rental properties for passive income. The location of your rental property can make a big difference for your ROI based on a number of different factors. Look for areas that are growing in popularity, and that have property values going in an upward trajectory. These areas are typically found in suburbs outside of major cities. Many times, these small cities and towns are infused with younger renters or people starting families that are looking to benefit from a major city by living close by but can’t actually afford to pay rent in said city.
Key factors to look for are areas with good schools to attract families. There is also the amenity factor where parks, restaurants and shopping centers will allow your tenants to enjoy their free time and look forward to living in the area long-term.
Investors should also be performing research on the area in which they are looking to invest. Some key investment statistics to be searching for include that the area has a stable rental market, with low vacancy rates and high demand. Avoiding poorly performing areas is just as important as finding a highly profitable market.
Finding the right tenants
Much like researching markets and properties, one of the biggest challenges of owning a rental property is finding good tenants. Investors will want to make sure that tenants are responsible, reliable, and will take care of the property. Throughout the course of owning an investment property, there will be some turnover when it comes to who is living there as a renter. Here are a few surefire ways to make sure you are getting the right tenant.
Run a credit check to ensure they have solid credit and want to keep it that way. Usually, people with high credit scores indicate that they are making their payments on time and are good with managing their money.
Asking for references is another way to find who really wants to rent out the property. This is an extra step that not all landlords perform but one that can be valuable. Having potential tenants seek out references lets a property owner know who is serious and who is not. Someone that will go the distance to find those references, especially if they are positive ones, is someone every investor wants renting out their property.
Lastly, property owners can conduct a background check to ensure that they’re renting to the right people. Any red flags should persuade an investor to move on to the next tenant. Someone with a criminal background may not treat your property with the respect it deserves and could tarnish it to a point where it could become unrentable barring significant repairs.
Minimize expenses and raise rents to remain competitive
This two-pronged approach is vital for investors to stay profitable and competitive in the market. For investors, keeping expenses low is a key to maximizing ROI. This means avoiding unnecessary repairs and maintenance, negotiating lower property taxes, and shopping around for the best insurance rates. It puts the onus on the investor, but taking shortcuts on these tasks can be detrimental to profit margins. Finding properties in rent ready condition can play a crucial role in this as well. Bringing renovation into the equation can potentially complicate the process. However, those rent ready properties that can start cash flowing immediately with a tenant in place is a huge win for investors.
While investors don’t want to price a property out of the market, they should consider raising rents every year or two to keep up with inflation and market rates. This will help maximize cash flow and ensure that an investor is getting the best possible return on investment. Keeping rents stagnant makes a tenant comfortable. Although having a tenant is always the main goal, raising rents is a normal expectation for any tenant. This way, you stay competitive and can increase cash flow. If a tenant declines that rise in rent, you can put your property back on the market and find a new tenant willing to pay that amount. If you start noticing that showings have diminished and no one is inquiring about the property, that may be a sign that the rent is too high.
Hire a property manager to enhance the tenant experience
Investors should always consider hiring a property manager. This is extremely important if investors don’t have the time or expertise to manage a rental property. A good property manager can take care of all aspects of the property, including tenant screening, rent collection, and maintenance, freeing up an investor’s time and helping them maximize the rest of their portfolio. Most of the tips discussed above can be covered by a property manager and allow for investors to spend their time wisely, i.e. finding more investment properties.
It’s always a good idea to factor in a property manager’s salary when determining the profitability of an investment property. Their day-to-day work flow is imperative and can be a nuisance to an investor who wants to expand their business.
A path to financial freedom
Investing in a long-term rental property can be a smart financial move, but it requires careful planning and execution. By following these tips, any investor can maximize ROI and build long-term wealth through rental income.
Finally, remember that investing in a long-term rental property is in fact a long-term strategy. It may take several years to see a significant return on an investment, but if investors are patient and consistent, they can build a steady stream of passive income that can help them achieve their financial goals.
