Residential
rental property has been one of the most lucrative investments for more than
two decades. It is not hard to understand why. As a general rule, property
tends to appreciate in value over time. Rental property even more so when you
consider that people will always need a place to live. Even when property
values themselves decline, rental properties continue to produce monthly
income.
Investing
in rental
property is
not a bad idea if you’re looking to round out your portfolio with a stable
asset that could counteract the risk of some of your more volatile assets. But
know this: succeeding in the real estate market requires knowing what you are
doing. Investing without the proper knowledge is like putting a blindfold on
and throwing darts at a dartboard.
Below are
the top three principles for making money in rental property. They provide a
good foundation on which to build a successful investment strategy:
<h2 Buy from the Right Sources
Rental
property is a lot like securities in the sense that you want to ‘buy low and
sell high’. The only difference with real estate is that you are not selling as
a landlord, you are renting. Yet the principle is still the same. You want to
pay as little as possible for a new property and yet rent it out at maximum
value. You cannot do this if you are not buying from the right sources.
The last
thing a real estate investor should be doing is checking agent listings and the
Saturday paper for available properties. Such retail sales are subject to
current market value. The truth is that market value is too much to pay. You
need to pay a lot less. So where do you go?
You look
around for off-market
properties.
These are properties that are not showing up in your weekly real estate
listings. They are auction properties, foreclosures, and short sales. Some are
even private sales offered by motivated sellers looking to dispose of their
property as quickly as possible.
<h2 Borrow from the
Right Sources
Just like
you want to buy cheaper houses from the right sources, you also want to borrow
from the right sources. The worst thing you could do is head off to your bank
in hopes of getting a traditional mortgage on your new property. Once again,
going the traditional route is going to cost you too much money. You are better
off seeking a mortgage broker with experience in rental property.
The
general rule among lenders is that monthly rental income should be at least
125% of the monthly mortgage payment. But remember that your monthly mortgage
payment will be determined not only by the principle you borrow, but also by a
range of additional factors including interest rates, monthly fees, and so forth.
Even your insurance will influence the payment. Therefore, it is in your best
interest to get the cheapest mortgage possible.
If the mortgage broker says it’s best to go with a buy-to-let
mortgage, then it probably is. If he says you are better off looking for a
three-year bridge loan, you have to consider that as well. The point is that a
mortgage broker with ample experience in the rental market is going to know
better than anyone else how to finance your purchase.
<h2 Buy in the
Right Areas
Finally,
making money in rental property is very much dependent on location. Of course,
you do not want to buy houses that will require too heavy an investment in
repairs and remodelling. But more important than that is where a property is
located. Location influences short-term rental value and long-term profit.
Buying
property in a university town is incredibly attractive because the location
will easily sustain the rental market. The same is true in cities with a high
volume of blue-collar jobs. People in those cities are more likely to rent than
their counterparts in cities with a higher rate of professional workers.
Your goal
is to look for markets where the rental property is in high demand and likely
to remain so for years to come. Maybe that’s a tourist destination. Perhaps it
is a major urban centre where sale prices are higher than average. You have to
look around and do some digging. You might even have to test the market a bit.
The only
caveat here is tenant quality. You might be strongly considering a certain area
for investment despite the quality of that area not being what you’d like. Be
cautious. The last thing you want is to buy a property that is likely to
attract poor quality tenants who might damage your property or not pay their
rent on time.
You can
make money in the real estate market as a landlord. Rental property is not the
best investment for everyone, but it represents a wonderful opportunity for
those who know how to make it work and are willing to put in the effort.
