Investing in Rental Properties for Beginners

Owning rental real estate is a dream that many investors share. The thought of completely passive income - income that can, in many cases, be quite lucrative - is something that anyone used to the nine-to-five workday can enjoy. However, as with many investment dreams, the reality is often an entirely new challenge - one that produces just as many headaches as it aimed to solve initially.

Despite this, with the right outlook and strategy, owning one or several rental properties can be a lucrative opportunity. Many landlords enjoy worthwhile earnings from their rental homes, all in a way that's largely free of inconveniences. But while many live the dream and benefit from it, a lot of landlords end up failing due to poor investment decisions and erroneous property purchases.

This quick guide - entitled 'Investing in Rental Properties for Beginners' - aims to solve those oh-so-common errors, and offer assistance to would-be property owners in search of a solution. If you are interested in owning real estate as a long-term investment, or merely as a source of rental cash, continue reading to learn some of the most common property mistakes, and how to avoid them.

The most important part of owning a rental property is planning accordingly for the expense of the property. Now, many people take this rule to mean the initial expense of purchasing property. That isn't quite it. Not only does property require an initial purchase, it requires constant upkeep costs or maintenance expenses; expenses that can often increase the older a particularly property gets.

This is frequently underestimated by would-be property investors and landlords, who fail to realize that a tenant may lead to long-term issues with the property and recurring expenses. Generally, it's a good idea to budget significantly more for each rental property than just the cost of the home and its mortgage, as recurring expenses and property maintenance can quickly add up to quite high sums.

These can include major expenses such as heating and air conditioning installations; roofing and gutter installations and repairs, and serious foundational work to the home in the event of a flood, earthquake, or other disaster. Likewise, simple replacements of home fittings can quickly add up and become a major expense, sharply cutting into the margins earned by renting the property.

Generally speaking, the amount of money that's put into maintenance on the home you're buying is linked to the term of the investment. Long-term investments can and will benefit from a budget for maintenance, while those for shorter periods may not. If you're planning to hold the property for an undefined or short period of time, consider how much maintenance could add to your bottom line.

The second point of concern is then long-term value of the home. While this applies to both homes and condominiums, it's certainly of interest to homeowners. The boom-bust cycle of real estate can both help or hinder your investment plans. A home that's been rented for twenty years at a stable or consistent rate may suddenly lose its value, making a short-term sale impossible at a good price.

This risk is somewhat avoidable in long-term property investments, in which the period of time that the property is rented for can outweigh the potential gains or losses by selling in an up or down time in the property market. However, it's worth considering your exit strategy before investing in homes to rent, as a poorly planned total strategy can end up pushing you to a difficult financial position.

Thirdly, there's the long-term value of the home itself. Rental properties in lower-income areas are a point of opportunity, as many of the neighborhoods these properties reside in can become gentrified over time. When investing in location-based property, consider the amenities found in the area and its convenience to other services, as these can impact an area's value over several decades.

For example, inner-city residential areas, particularly those that are relatively inexpensive today, are quickly growing into vibrant, somewhat high-end neighborhoods. Classic examples include Harlem in New York City, which, over the past two decades, which saw property values increase 30 percent throughout the 1990s. This can transform a rental property into a lucrative long-term investment.

Finally, there's the issue of financing a rental property. Purchasing property, particularly in major cities, can be an expensive and difficult process. Would-be property buyers will need a history of good credit in order to secure a good loan for the property. This can often take a decade to build, and a variety of payment related issues in the past can stand in the way of getting a good loan.

For this reason, it's often worth approaching a home loan as a process. Build your credit score in advance of the planned property investment through vehicle financing and other relatively small purchases. Many people that already own property have more success in securing a good second loan for the new property due to their history of mortgage repayments and successful financing.

Owning rental property can be a lucrative, worthwhile investment if performed and planned for with the right amount of care. Think twice before taking on any deal, and consider how it will look in ten or twenty years time. When purchasing a rental property for the first time, there's no such thing as too much research. Plan ahead and be careful, and you could end up with a lucrative rental home.