If you want to build wealth and generate a steady stream of passive income for yourself, there are few methods as stable as real estate investing. Investing in rental properties, and other forms of real estate, are especially effective at building wealth because:
- Real estate value is consistent. Real estate is finite and has always been valuable. It also has a long history of upward growth.
- The income generated is passive. When you collect rental income in excess of your monthly expenses, you’ll pocket the difference -- and often, you won’t have to lift a finger to collect it.
- Real estate investing is scalable. You can stick with a single income-generating property, or scale your efforts to dozens of properties, depending on your goals and current capacity.
The biggest downside is the intimidation factor: if you’re new to real estate investing, you probably aren’t sure how to get started. Fortunately, it’s easier than most people think.
How to Time Your Investment
When is the right time to start investing in rental property? Ideally, you’ll have:
- Stable primary income. If you have a few properties or one big property, you could use rental income as your primary source of revenue. But if you’re just starting with one property, you probably won’t be able to connect those dots. Plus, as the Motley Fool’s Matthew Frankel points out, the income from rental properties can be starkly inconsistent. Before you start investing in property, make sure you have a stable source of primary income to draw upon.
- Reasonable personal expenses. You also shouldn’t invest in rental property if your personal expenses are excessive or unpredictable. If you’re making lots of debt payments, for example, the last thing you need is another potential source of expenditure.
- Some understanding of real estate. Don’t invest in real estate until you’re familiar with some of the basic tenets of real estate investing. You don’t need to become a market guru or a real estate expert overnight, but you should be familiar with some of the most important factors driving price fluctuations and how they interact with each other.
- Some experience buying and/or selling property. Though not explicitly necessary, it helps to have some experience with buying or selling property (such as buying your own home). If you don’t have this experience, you can read up on the home buying process; Zillow offers a thorough guide on the subject.
How to Finance the Property
So how can you finance the property? If you have the cash, you can buy it outright but that’s not usually the case. More often, you’ll need some other way to close the gap. For example, you could partner up with a friend or family member to split the costs and profits of the property.
However, it’s more common to borrow money, through a mortgage, to cover whatever costs you can’t meet with your down payment. Using a mortgage broker or help from some specific lenders’ mortgage loan officers, you should be able to find a loan that meets your needs. If you need help determining the right amount to borrow for your personal budget, Tundra has a fantastic house budgeting calculator.
Choosing the Right Property
So what does the right property look like? If you’re new to investing and want to make things easy on yourself, these are the top qualities to look for:
- Single-family home. Single-family homes are easy to fill and manage, making them one of the best entry-level choices.
- Familiar area. Invest in an area you understand and are familiar with. You’ll end up making smarter decisions.
- Low-risk investment. Aim for properties with newer features and lower risks (such as lower crime rates).
- Potential for growth. Be sure to invest in neighborhoods with the potential to grow in order to maximize your property’s potential appreciation.
What to Do Next
If you feel like you’re in a good position to start investing in rental property, but you aren’t sure what to do next, follow these steps:
- Start saving for a down payment. Typical home loans require at least a 5 percent down payment, but you may consider investing 20 percent or more. Start saving early.
- Build up an emergency fund. Start setting aside money for emergency repairs and maintenance on your real estate and be prepared for unexpected expenses.
- Shop for property. Start looking around. You don’t have to take the search seriously yet, but it pays to get a feel for what’s out there.
Real estate investing can be complicated but it’s not as difficult as some people would have you believe. As long as you’re financially stable, and understand the basics of real estate value, you can make a smart investment that generates passive income for the foreseeable future.
Disclosure: I do not own any of the stocks mentioned in this article.
