If you’re wondering how to invest in rental properties and build long-term wealth, you’re in the right place! As real estate investors ourselves, we know first-hand the exciting potential to generate passive income, enjoy tax advantages, and build equity over time. The journey to wealth creation through real estate is a promising one, but it’s crucial to do it right.
So, how do you invest in rental property the smart way? Whether you’re just learning how to invest in rental property for passive income or you’re ready to add more doors to your real estate portfolio, here are ten proven tips to guide your success.
10 proven Tips for Investing in Rental Properties
1. Get Very Clear About Your Investment Goals
Before you invest in rental properties, know your “why.”
- Do you want monthly cash flow, long-term appreciation, or a mix of both?
- Do you want to benefit from the tax advantages?
- Do you want to diversify your investments with more inflation-proof assets?
- Do you want to build generational wealth?
Knowing your real estate investing goals before you begin will help shape your investment strategy and determine what markets, property types, and financing options are best for you.
2. Understand the Different Ways to Invest in Rental Properties
When learning how to invest in rental properties, you’ll quickly discover that there are multiple strategies investors use. Some require a lot more attention, like flipping and BRRR, while turnkey real estate investing and real estate syndications provide a more passive approach.
Understanding the different methods and what is best suited for you is essential when shaping your investment journey.
- Turnkey investing: This is a method where you buy a property that is already rehabbed or newly built and comes with property management in place. In other words, it’s a ready-to-go investment that requires minimal effort on your part.
- Buy and hold: Long-term rentals that generate monthly income.
- House hacking: Living in one unit while renting out others.
- Short-term rentals: Vacation rentals or furnished rentals for nightly/weekly guests.
- BRRRR: Buying a fixer-upper, then rehabbing, renting, refinancing, and repeating the process.
Choosing the method that best fits your time, skills, and risk tolerance is super important. Not everyone wants or has the time to flip or BRRRR, plus, this route usually turns into a full-time job. If you are a busy professional who enjoys your job but is keen to diversify your investment portfolio or create a passive income stream, consider turnkey real estate investing, as a property manager handles the day-to-day landlord obligations for you.
Along with the various investing strategies, there are multiple property types to consider, such as:
- Single family
- Duplexes
- Triplexes
- Fourplexes
- Multi-family
- Real estate syndications (for accredited investors)
Being clear about your “why” will help you determine the method for your investing strategy and property type.
3. Know Your Numbers
Savvy investors always run the numbers. The more comfortable you are with this part of the process, the more likely you can act fast when a good deal comes your way. Learn key metrics like:
- Cash-on-cash return (CoC): The ratio between an asset’s annual cash flow and the property’s down payment. Generally calculated before taxes.
- Cap rate (CAP Rate): Calculated by the Net Operating Income or NOI (defined below) divided by the sale price or value of a property.
- Gross rental yield: The total income made from a property, divided by the purchase price and closing costs. “Gross” refers to the total income before deducting operating expenses.
- Price-to-rent ratio: Used to compare buying a property in an area versus renting.
- Net operating income (NOI): Income generated annually from an investment property, minus the expenses associated with it. NOI is calculated before tax and does not include depreciation, loan payments, or capital expenses.
Understanding the numbers and the terminology helps you compare deals and determine if a property is likely to perform. For instance, a high cash-on-cash return (CoC) indicates a potentially profitable investment, while a low price-to-rent ratio suggests that it might be more cost-effective to rent in that area. If you need an industry terminology refresher, bookmark this real estate definitions page.
4. Start with a Strong Real Estate Market
Location matters when investing in rental properties. The best places for rental properties are often in markets with:
- Job and population growth
- Affordable home prices
- High rental demand
- Landlord-friendly laws
Many people are finding themselves outpriced in their local real estate market. If that sounds like you, out-of-state real estate investing is a great option to find a market that aligns with your investing goals (cash flow, appreciation, hybrid) and the amount of money you have set aside for your down payment (typically 20% to 25%).
5. Line Up Financing Before You Begin
When you decide to invest in rental properties, you most likely will get a loan through a mortgage lender. Getting pre-approved helps you understand how much of a property you can afford and can give you an edge when making offers. RealWealth members get access to vetted lenders who provide options for real estate investors like conventional loans, DSCR loans (debt service coverage ratio), non-recourse loans, and more.
6. Build a Trusted Team
Investing in rental properties is not something you do in a silo. You need to create a trusted team. Surround yourself with:
- A turnkey real estate company like RealWealth or a real estate agent who is an investor
- A lender that offers a variety of loan types for real estate investors
- An experienced property manager
- An insurance agent who understands landlord insurance
- A CPA or tax strategist who is well-versed in all things real estate
Take the time you need to vet potential team members. Get details about their experiences and reviews from trusted sources.
At RealWealth, our mission is to help people learn how to invest in rental properties and then connect them with the right people so that they can invest in turnkey rental properties wisely. If you choose to work with us, you’ll get access to our list of recommended real estate professionals, including lenders, CPAs, 1031 exchange facilitators, and property teams that sell off-market turnkey rental properties with property management in place.
7. Treat Your Rental Property Like a Business
When you invest in rental properties, you need to monitor your investments like a business. Track expenses, calculate your ROI (return on investment), and keep excellent records. Use accounting software or hire a bookkeeper to help manage the financial side of your investment properties or portfolio. Being organized will help you understand how the property is performing and make tax time much easier.
8. Don’t Skip Your Due Diligence
Before you invest in rental properties, always:
- Get a home inspection
- Get a home appraisal
- Verify rent comps
- Review the lease and tenant history
- Understand local laws and regulations
Making sure you do all of the due diligence steps on your end protects you and your investment. Most importantly, it helps avoid making costly mistakes.
RealWealth is the only turnkey real estate company that has defined turnkey property standards, which we call our Real Income Property Standards. When analyzing a property and going through the home inspection process, we encourage all of our members to use these guidelines to ensure the property meets expectations.
9. Think Long-Term Gains
Real estate investing isn’t a get-rich-quick scheme; the best rewards come with time. Most investors hold their properties for five to seven years, and some even longer. The best strategy is to buy quality rental properties in stable markets and hold them for the long term to maximize cash flow, appreciation, and equity build-up.
10. Keep Learning
Markets change. So do tax laws, financing options, and renter expectations. Stay informed by reading blogs, listening to podcasts, like The RealWealth Show and Real Estate News for Investors, attending webinars, property tours, or live events, and networking with other investors.
Quick Answer: How to Invest in Rental Properties
Want to invest in rental properties, but aren’t sure where to begin? We’ve rounded up the top ten proven tips to help you smartly buy rental properties for passive income and invest wisely.
- Clarify your investment goals.
- Learn key rental property metrics.
- Choose a strong real estate market.
- Explore rental property strategies like buy-and-hold or turnkey investing.
- Line up your financing before you shop.
- Build a trusted team to support you.
- Treat your rental property like a business.
- Do your due diligence.
- Commit to long-term gains.
- Continue learning and growing as an investor.
With the right approach and the right team, investing in rental property can generate passive income, build equity, and help you achieve lasting financial freedom. Need a step-by-step plan? Follow our 90-day roadmap!
Final Thoughts
Investing in rental property doesn’t have to be complicated. Continue to educate yourself, and surround yourself with the right people. With the right strategy and support, you can build lasting wealth one door at a time. Ready to go deeper? Follow our 90-day roadmap to buying your first rental property!
