Real estate has long been considered a solid investment, and for a good reason. It can offer stable income, appreciation, and portfolio diversification. And while there are many different ways to invest in real estate, one of the most popular — and potentially most profitable — is through rental properties.
We’ll break down the different types of rental properties and how you can make passive income by becoming a landlord.
Short-term vs. long-term rentals
There are two main types of rental properties: short-term and long-term.
Short-term rentals are typically used by travelers or people in town for a specific event. They are usually rented out on a nightly basis and require more upkeep than long-term rentals.
With the rise of sites like Airbnb, short-term rentals have become more prevalent in recent years. While they can be more work, they also have the potential to generate higher income.
In addition, savvy hosts can use technology to automate processes like guest communication, keyless entry, and replenishment of supplies.
Short-term rentals are more effective in areas with high tourism rates.
Long-term rentals are leased for a set period, usually six months to a year. These rentals are popular with families or individuals looking for a more stable living arrangement. While the income from long-term rentals is generally lower than from short-term rentals, they require less work and can be a more passive form of income.
When it comes to generating passive income, there is no better investment than multi-family properties.
Multi-family properties are buildings or complexes with more than one unit or apartment, including anything from duplexes and triplexes to apartment buildings and condo complexes.
Multi-family properties offer investors several advantages over other types of investments, including:
If you’re looking for a passive income investment that will offer high returns, multi-family properties are a great option.
- Higher rental yields: With more units, you’ll be able to house more tenants and generate more rental income.
- Economies of scale: Multi-family properties offer economies of scale that can save you money on insurance, marketing, and repairs.
- Diversification: Owning multiple units in a single complex allows you to spread your risk across numerous investments. If one unit experiences problems or falls vacant, you will still have income from the other units to cover your expenses.
Make a sizeable downpayment
Before purchasing a multi-family property, you must save up a sufficient down payment. This is because mortgage lenders often require a higher down payment for investment properties than primary residences. In general, you will need to put down 20-25% of the purchase price to qualify for a loan.
Paying a higher down payment will have several advantages for investors:
- It will allow you to get a lower interest rate on your mortgage, saving you money over the life of the loan.
- It will give you equity in the property from day one, which can be helpful if you need to sell the property or take out a home equity loan in the future.
- It will reduce your monthly mortgage payments, giving you more cash flow to invest in other properties or cover repairs and vacancies.
Get familiarized with market prices
Investors should also familiarize themselves with market prices in the area where they are looking to purchase a property. This will help you determine how much you can expect to generate in rental income. It will also give you an idea of what type of property you can afford to purchase.
Several online tools can help you research market prices, including:
- Zillow’s Rent Index: This index tracks rents for single-family homes, townhomes, and apartments across the United States.
- Trulia’s Mortgage Affordability Calculator: This calculator allows you to input your monthly income and debts to see how much house you can afford.
- Zillow Home Value Forecast: This tool uses data from the Zillow Home Value Index to predict how home values will change in the future based on current trends.
Research and forecast
When you’re considering purchasing a rental property, it’s essential to do your research and forecast future trends. You will want to look at the local job market, population growth, and housing demand. These factors will affect the future value of your property and the likelihood of it being rented.
It’s also important to be aware of any upcoming changes that could impact the rental market in your area. For example, if a new highway is being built to make commuting easier, this could lead to an influx of new residents and an increase in demand for rentals. On the other hand, if there are plans to build many new apartments in your area, this could harm rents and occupancy rates.
By staying up-to-date on local market trends, you can ensure you’re investing in a property that will offer high returns for years.
Purchase your property and fill it with tenants
Once you’ve found the ideal property and secured financing, it’s time to make your purchase. Once you own the property, your next task will be finding tenants and filling all the units.
To attract high-quality tenants, you must ensure your units are in good condition. This means ensuring that all appliances are in working order, the paint is fresh, and the carpets are clean. Consider upgrading the fixtures and finishes in your units to appeal to higher-end renters.
Marketing your units can be done in several ways, including:
- Listing them on online rental platforms like Zillow, Trulia, and HotPads.
- Advertising on social media platforms like Facebook and Instagram.
- Putting up signs or flyers in the local community.
- Working with a property management company.
The Bottom Line
Becoming a landlord can be a great way to generate passive income. By researching and forecasting future trends, you can ensure you are investing in a property that will offer high returns for years to come.
It’s important to remember that attracting high-quality tenants is key to generating profits. Make sure your units are in good condition and market them aggressively to find the right renters. Managing a rental property can be a lot of work, but it’s worth it when you see those monthly rent checks rolling in.