Ready to get in the real estate investing game? One of the best and most profitable ways to get started is to buy residential rental properties.
Step one is finding the right property.
In this simple guide, I’ll break down the process of buying a residential rental property and cover everything from choosing the right type of property to contacting homeowners and calculating return on investment.
Types of Rental Properties
Before learning how to buy a rental property, you need to understand the different types of properties you can choose from.
Essentially, there are three types of residential rental property options:
- Short-term rental: Short-term rentals (think Airbnbs) are rented out for days or weeks at a time, usually for less than 90 days.
- Long-term rental: Long-term rentals, on the other hand, are more permanent and usually come with a lease that runs for six months or longer, bu can sometimes go month to month
- House hacking: With house hacking, you buy a single or multi-family property, live there, and rent out a portion of the home or the additional units to earn income.
Each of these strategies has its share of advantages and disadvantages. For example, you might have a higher immediate earning potential with a short-term rental than a long-term one, but you’ll also have to deal with more maintenance fees and constantly market the property.
Steps to Buying a Rental Property
Once you’ve decided on the type of property you want to buy, it’s time to hit the market. Here are a few steps to help you land a home that’ll pay off.
Look In the Right Places
Choosing a neighborhood that will attract renters and keep them there is key to profitable real estate investing.
Here are a few factors you should keep in mind as you start your search.
Buying a house in a neighborhood with a high vacancy rate, high crime, or few homes to begin with won’t get you very far. Instead, focus on neighborhoods that are established or up and coming. Go with neighborhoods that aren’t the best in town, but aren’t the worst either, to get started.
Look out for new developments and construction, too. They can indicate future growth in the area.
You should also consider the property class. Property classes are defined by a home’s age, location, and overall state. Class A properties, for example, are new or fully renovated homes that are in great shape in prime residential locations.
On the opposite end of the spectrum, Class D properties are over 30 years old, in a state of disrepair, and usually located in areas with high crime rates, with class B and C properties falling in between the two.
The best property class for you depends on what you’re willing to put into, and looking to get out of, your investment.
Before you even think about making an offer, you need to do some homework. After scoping out the property, make some comparisons.
Start by finding a comp, which is a comparable property to the one you’re looking at in terms of its size, condition, and location. Find a comparable home that is either on the market or recently sold to evaluate the listing.
You should also look at comparable rent rates for nearby properties to see how much you can expect to earn on a home.
Learn More About the Area and House
Once you determine that the neighborhood and property check your basic boxes, dig deeper. Ask questions that give you more insight into the area’s job market, amenities, crime rates, and schools.
There are plenty of ways to find this info beyond poking around on the internet. Try these outlets to scope out the property:
- Attend networking events
- Talk to homeowners in the area
- Build relationships with realtors and property managers
- Contact the city or county’s economic department
I also recommend checking out Propstream, a super useful tool that provides real estate market data and helps you store homes and contacts.
If you’re serious about real estate investing, you have to do more than just market properties to renters after you buy them.
To attract motivated sellers in today’s market, you need to create some targeted marketing strategies. Here are a few tried and true methods:
- Cold call: Find a home listed as “for sale by owner” or one that’s in foreclosure or vacant? Cold calling the owner could lead to a sale. There are plenty of scripts online if you’re looking for inspiration.
- Text: Text campaigns have a decently high response rate because of how quick and easy texting is for respondents.
- Mail outs: You can also use a targeted direct mail campaign to reach potential sellers.
- Email: Similarly, an email list targeted to potential sellers in your area could be a successful method of outreach.
- Social media: Whether you’re a social media master or not, it’s a huge asset for marketing your real estate efforts. Facebook, Instagram. Twitter, LinkedIn, Youtube, and even TikTok can help you to build your reputation as a credible investor and build connections.
- Knock on doors: It might seem intimidating to some, but knocking on doors for some really direct contact with a homeowner can sometimes lead to success in real estate investing.
Regardless of which outlets you use to connect with homeowners, it’s important to come prepared. Have a game plan, be human in the way you interact, and target the right leads for the best chance at success.
Choose the Right Owners to Contact
Now that you know how to contact owners, it’s important to understand who you should contact. Reaching out and asking someone if you can buy their off-market home is a delicate task.
My biggest piece of advice? Start with low-hanging fruit. Your best bet is to target homeowners who are likely to be willing to sell their property on short notice.
Here are the types of homeowners you could encounter:
- Vacant: These are empty homes that aren’t in regular use. Owners of vacant homes may be inclined to sell.
- Non-local: Owners who live out of town or out of state may also be more willing to sell than local homeowners.
- Local investors: You should also reach out to other investors in your area who are constantly looking to buy and sell like you.
- Owner-occupied: Depending on the circumstances, you may also reach out to owners who live in their homes if you think they may be inclined to sell.
How to Analyze Rental Properties
To analyze a real estate property’s cost, income, and other factors, you need to use a rental property calculator.
What to Calculate
To accurately calculate your rental property’s value, here’s the information you’ll need:
- Home information: Closing cost, purchase price, renovation cost, and rent
- Financing info: Mortgage amount, interest rate, loan term, and monthly payment
- Expenses: Vacancy rate, maintenance, management fees, taxes, insurance, HOA
- Assumptions: Assumptions such as expected increasing returns and expenses
If math isn’t your strong suit, you can find free rental property calculators online to help you crunch the numbers.
Year One Summary
After a year of renting your residential investment, you’ll have even more concrete data to work with. Rather than projections based on estimates in the area, you get to calculate your property’s actual worth based on your hard-earned dollars. Here are some of the ways you can calculate profitability one year out:
- Cash flow: Think of cash flow as the money that flows in from your property in revenue, minus the money that flows out to operate it.
- Cap rate: The cap rate is your expected yearly yield on an investment, based on your property’s net income.
- Cash on cash: This is your annual cash flow, divided by your initial cash investment. Think of it as the return you are getting on all of the money you put into the deal.
- NOI: Short for net operating income, this is your gross operating income minus your operating cost.
There’s a lot more to rental property investing than just buying the first house you see and filling it with tenants.
If you do some homework up front, you can land on just the right property and increase your profitability.
Fortunately, there isn’t a complex equation to follow to find a winner. You just need to know what you’re looking for, where to look, who to contact, and how.
Once you settle on a property that’s worth your while, calculate its value and come back in a year to see how your earnings compare.