Have you ever wondered how you can use rental real estate to increase your net worth? You’re not alone.
There are thousands of people who rent homes, condos, and apartments that have never thought about this. It can be challenging to figure out how to make the move towards becoming a landlord.
One of the most important steps in building wealth is to create a plan that helps you maximize your income and minimize your expenses.
As you work to increase your income, you also want to be sure that your assets are working as hard as you are. Rental real estate can be a good way to achieve this goal, and it’s a tool that should be part of everyone’s wealth creation toolkit.
In this post, we cover the basics of using rental real estate to increase your net worth.
What is Rental Real Estate?
Rental real estate is when someone buys or builds a property and rents it out to tenants for a monthly fee. The renter has the right to live there for an agreed-upon period of time, but the owner retains ownership of the building and all rights to the property.
Rental income is something that can be received from many different types of properties including single-family homes, condos, townhomes, duplexes, and even more complex triplexes.
Why Rental Real Estate is a good Financial Move?
If you want to know how to increase your net worth, then there are two things you need to do: reduce liabilities and increase assets.
There are plenty of ways to do both, but one of the most effective is through rental real estate.
Owning rental real estate gives you a great way to build wealth. Once you pay off the mortgage, your renters are essentially paying for your property taxes and insurance for you. If you’re lucky, they may even cover the entire mortgage payment.
Rental income is also a great way to generate cash flow if you’re looking to become financially independent early (FIRE). However, it’s important to understand how much money owning a rental property can really make or cost.
Using Rental Properties to Increase your Net Worth
When it comes to making money from rental real estate, you have two main options:
Buy a property and rent it out while collecting income from renters. This allows you to earn positive cash flow without having to put any more capital into the property over time. The downside, however, is that you’ll have to pay taxes on the rental income. Also, you’ll have to deal with renters who may not pay their rent on time or damage the property.
Invest in a property until it increases in value and sell it for a profit. This option is known as “flipping” because you’re buying a fixer-upper and turning it around quickly for a profit. The downside is that you’ll need money to invest in repairs and renovations before you can sell the property for a profit.
Rental real estate can be useful as an investment tool because it allows you to generate income from your investments without having to put much more capital into them over time.
How to find the right rental property
Buying a rental property is an excellent way to supplement your income, but it’s not always easy money. It takes time and effort to find the right property and manage it properly. But with careful screening of tenants and attention to maintenance, you can make a tidy profit from your investment.
Here are some of the best tips for maximizing your rental property’s potential:
Find the right property at the right price. This is job one for the amateur landlord. The most important factor for success is whether you pay too much for your property upfront.
Before you begin searching for a place to buy, consider how much rent you can realistically charge and how much you’ll need to spend on maintaining that property each month.
Your expenses will include repairs, insurance, taxes, and utilities that don’t get covered by rent. When you add all these up, they’re called “cash flow.” You want to look for properties that will generate positive cash flow each month — meaning they’ll make more money than they cost to maintain.
Once you know what amount of cash flow your target properties should generate, start looking at different neighborhoods in your target city and assessing which ones are best. Consider factors like schools, parks, and other amenities that can affect how desirable each neighborhood is.
How to set your rents?
Setting rent doesn’t have to be a guessing game. You want to set rents high enough to cover your costs and make a profit, but it still needs to be low enough that tenants are willing to pay it.
We’ve covered how to calculate rental property expenses, so now you know what the landlord expenses are for your property. But what about the market in your area?
You can set rents based on comparable properties in the area by following these steps:
Check out comparable properties in your area. This is also known as “comps” or “comparable sales.” Check out listings just like yours on Craigslist, Zillow and any other website where you can find rentals in your area.
Adjust the comps to fit your own property. If a comp has a better kitchen than you do but you have a newer roof than they do, adjust your estimates up or down accordingly.
Determine the rates for each of these properties based on their features and location relative to yours (this is called a “rental comparability study”). You should be able to get an idea of rental rates for similar properties in the area.
Average all of these rates together and voila! You now know.
How to market your Rental Property?
In order to attract the best tenants, you have to find a way to differentiate your properties from others. It’s not enough to post a few pictures and wait for people to contact you — you need to actively market your property.
There are many ways that you can do this, but it’s important to keep a central theme or concept in mind. This will help you make decisions about how much money you spend on marketing efforts, and it will help you communicate what makes your rental property unique (and why someone should want to live there).
For example, if your building only has one-bedroom apartments, focus on the idea of luxury living in a small, boutique-type setting. If all of your units are two or three-bedroom apartments, focus on the family-friendly feel of the apartment building.
Owning rental real estate can be extremely rewarding and it has a path to create great wealth for many people. There are many different strategies on how to use rental real estate to increase your net worth, including flipping houses, buying real estate with other people, as well as owning several Invest in Real Estate Trusts or Real Estate Investment Trusts like Vornado Realty or HCP Inc.
This is one of the safe and better strategies for people looking to build wealth and increase their net worth in the long run