A rental property can be residential and commercial, and it is leased to a tenant or more than one tenant. One of the significant advantages of investing in a rental property is the positive cash flow and return on investment.
We had a chat with Winston Deloney, a Chicago based entrepreneur and real estate investor, and he gave us some insights on investing in the rental property market.
Winston, why is it important to understand the basics?
We have the residential and commercial rental properties, and each type has its peculiarities. Residential rental properties include single-family homes, duplexes, triplexes, and quadruplexes.
Commercial rental properties include office spaces, multi-family complexes, rental spaces, and multi-use commercial buildings. Before you invest in a residential or a commercial rental property, you should understand each type of housing’s peculiarity.
Why Location Matters for Rental Properties?
Even though real estate can give you a passive income source, you must be hands-on with the process. Where your property is located will influence the property’s price, the availability of tenants, and the general profitability of the venture.
You should never choose a property because it is close to your area or within your city. Pick a property with a selling price that is relatively lower to your cashflow within a few years.
When deciding on a property, you must be creative with your choice. Sites like ForRent.com and Zillow not only let you know available listings, you can use the statistics to determine the type of properties that may be in high-demand if built within an area.
For example, the listing may show a predominance of single-family homes; setting up a duplex may become a hot rental piece.
What are the most important factors in funding rental properties?
The unsaid rule of thumb in real estate is: you must provide enough funds to move your real estate project to a successful finish. Whenever you decide to purchase a rental property, the timely availability of funds may determine if the project will be profitable—or not, or if it will end up as a debacle.
Factors that determine the availability and size of funding include your credit score, down payment on the property, your relationship with financial institutions, income level, inflation, and more.
How should investors estimate a rental property’s value?
Property valuation means ascertaining the real value of a real estate property. An available property valuation will ensure that you do not overpay for a rental property.
Remember that a property valuation serves as a guide when you negotiate on a property price with the seller. Factors like demand for property, depth of renovation, and more can influence a property’s worth.
How do you determine the level of rehabilitation needed in a rental property?
Only new properties do not need some form of rebuilding or rehabilitation. If you are purchasing a rental property, you should confirm if rehabilitation will not waste your time or eat into your profit.
Every extra minute spent on a real estate project results in more potential loss; therefore, always ensure that a property is rent-ready if you need an immediate cash flow.
How much cash flow should rentals make?
When purchasing a rental property, it is entirely possible not to record a positive cash flow in two years—this does not negate the deal; however, if you are bent on achieving an immediate positive cash flow, you should consider factors like down payment, interest rate, and revenue made from rent. To have a positive cash flow, income from rent must be higher than mortgage repayment and interest expenses.
Rental properties are excellent for making passive positive cash flow; however, if you want to invest in rental real estate property, you must always consider factors like location, price, inflation, demand, rent rate, and how to handle tenants.