If there ever was a time-tested, profitable, and secure investment, it's rental properties. It's no wonder why there are 11 million independent landlords in the US, making real estate one of the most popular investments in the country.
Well, just because it's popular doesn't mean it always works. No investment is 100% safe, but there are a lot of ways to maximize your profits with real estate.
Let's talk about how to invest in rental property as a first-time landlord in San Diego!
Why Should You Invest in Rental Property?
No matter how much you hear about cryptocurrencies and other hot-topic investments, serious investors still know where to put their money. Most millionaires still agree that real estate is the best investment in the world.
It's not surprising when you think about it. It's a tangible investment, there are so many options investors have with real estate, and everybody needs a place to live.
Also, what other investment allows for this level of control for only 15% to 20% down? You can't make all of the decisions of a corporation by owning 15%, but you can with a rental property. This allows you to make wise decisions with your investments and maximize profits however you see fit.
Moreover, the reason so many investors choose long-term rentals is that they offer the most stability out of any other investment. House-flipping is risky, and short-term rentals rely heavily on tourism and the economy. However, long-term rentals allow you to set policies, keep up with inflation, and build equity along the way.
Let's do out the math and say you bought a 2-unit rental property for $200,000. If you rent each unit for $1,000, your gross income will be $24,000 each year without vacancies. If you pay $450 a month for your mortgage, $150 for property taxes, and $50 for insurance, that's a total of $7,800.
Now, let's say you spend $1,000 on maintenance and repairs during that time and another $1,000 on miscellaneous expenses. That still nets you $10,200 a year after expenses, and you've only built more equity in the home that you can later resell, potentially for a profit.
How to Invest in Rental Property
Clearly, rental properties are a smart investment, but only if you know how to invest safely. Here are the essential rules for first-time landlords to maximize the profitability and security of their investment property!
Choose the Right Property
There are a few different factors in an investment property that will affect the profitability of your investment. The first, and arguably most important, is the property itself. If the property requires too much work for the price, then it won't be worth it for an investor.
For this reason, it's essential to get a thorough inspection of your property, even if it was recently built or renovated. You don't want to spend all of your savings on a down payment only to need a new water heater and roof months later. Inspections will only cost $300 to $600, and it could save you a small fortune on repairs and help you choose the right property.
Choose the Right Location
You know the old real estate mantra "location, location, location". Well, we could easily add a fourth one in because it really is that important. Buying in the right city or neighborhood is essential for the long-term health of your investment.
If too many people are moving out of the area, the area goes downhill, or jobs are taken away, you could lose a lot of money. There are ways to secure your investment, but there is no such thing as guarantees as an investor.
For example, buying a property that's near a public transportation line, public park, downtown area, or public school is a lot more secure than next to a grocery store. Businesses come and go, so think long-term about the area. Feel free to talk to other landlords or homeowners in an area and look into the home market trends nearby for more information.
Find the Right Tenants
Finding tenants isn't a challenge because, well, everyone needs somewhere to live! The challenge is finding good tenants.
Your tenants are the third and final factor that is somewhat out of your control as a landlord. Again, you can exert some level of control before committing. This means attracting and screening the best tenants.
Renting a property is a two-way relationship. Therefore, high-quality tenants are going to look for high-quality places to live. If they don't like you, your policies, or your marketing efforts, they will look elsewhere.
Of course, we're not suggesting that you need to offer anything you're uncomfortable with. However, finding the right places to market your property online, staging it properly, and responding promptly is sure to impress prospective tenants.
From there, it's all about screening. Always ask for references, credit reports, and income verification. If you have families living in the building, a criminal background check is also helpful.
Try to ensure that the tenant's net income is at least 3 times the cost of rent, but preferably 4 times. While these steps aren't perfect, they will do a great job at weeding out most of the tenants that will cause harm.
Tips For First-Time Landlords
Now that you know more about buying property and finding tenants, you have the essentials down. However, there are some tips that every first-time landlord should know to be successful in the industry. Here they are!
Develop a Quality Lease Agreement
There's no guarantee that you will always get good tenants. Even if you follow the steps we mentioned, you could still end up with some less-than-ideal tenants from time to time. Because of this, it's important to have an airtight lease.
The sooner you can get rid of problem tenants, the better. Also, you need your lease to stand up in court in the event a tenant files legal action against you. The only way to prevent this and protect yourself is with a quality lease agreement.
Always talk to a professional real estate attorney and update your lease every year or two as policies change.
Ask for References
We know we mentioned this already, but there are important tips to consider. Don't just ask to speak to a prospective tenant's current landlord. That landlord might tell you what you want to hear just to get rid of them.
Instead, ask for multiple references. If they don't have multiple references, that's okay. Most applicants will, and you have other screening measures in place.
When speaking with references, ask whatever questions you want to know. The most important include:
- Can you confirm this individual rented from you?
- Did the tenant pay rent on time?
- Was the tenant disruptive to other tenants?
- Did the tenant take care of the property?
- Did the tenant leave on good terms?
These are good starting points, but you may have other questions that are important to you. You can ask if they were communicative, if they caused any drama, or whatever else you want.
Choose the Right Real Estate Services
Whether you're looking for a real estate agent, property manager, or attorney, find one that meets your needs. Having people on your side that understand both real estate, and specifically rental properties, will help you succeed.
When choosing real estate services, feel free to ask for references, read reviews, or ask about their experience. You're paying your money for these services, so make sure you get the right ones for your needs!
Create a First-Year Budget
Create a budget and try your best to stick to it. If that means shoveling snow and mowing lawns yourself, do it. It's easy to overspend while you still have a mortgage, so understand your cash flow and base expenses before jumping into anything!
To play with the costs and get a rough estimate of your expenses, use a rental property calculator. Remember to always aim for higher expenses to play it safe!
Also, remember to determine your goals ahead of time. Do you want to build a rental property portfolio, or is this property supposed to be a retirement nest egg? Either way, make sure your budget aligns with your goals.
Start Investing Today
Now that you know how to invest in rental property as a first-time landlord, set yourself up for success right off the bat. Real estate is a fantastic investment to make, as long as you take the proper precautions and continue educating yourself.
Stay up to date with our latest real estate news, and don't hesitate to contact us with any questions or for help with your San Diego real estate investment!