Passive income.
The very phrase conjures images of wintering in Aspen and summering in Cancun. For the select few who have conquered the mountain this may be their reality, but make no mistake, investing in rental properties could be some of the hardest and most time-consuming work you’ve ever encountered. Contrary to what cable television will tell you, a tremendous amount of hands-on experience and broken dreams make up the bridge between a daily grind and financial freedom. But if you’re ready to start building that bridge, there are several ways to get started. Below are just a few ways you can learn how to invest in rental properties, depending on just how much blood, sweat, and tears you are willing to expend.
Gloves and goggles on? Here we go…
Going it Alone
While it is certainly not for the faint of heart, beginning to invest in rental properties on your own is definitely the best way to maximize your income. It’s also the best way to run yourself into the ground. There is plenty to consider if you plan on carrying the load so make sure you know what you’re getting into.
Due Diligence
I don’t like the sound of it either, but when hundreds of thousands of dollars are on the line, due diligence can be the difference between financial freedom and financial ruin. Pre-made checklists like this one can get you started but they can also be extremely daunting. Each line can lead you down a very deep rabbit hole full of permits, technical terminology, and volumes upon volumes of research.
There simply are no shortcuts. Taking every opportunity to uncover major problems like bad plumbing and electrical could save you many times over the effort you spent researching. Even more important, they could save you from lawsuits further down the road if left unrepaired or undiscovered.
ROI
You must be utterly meticulous about deciphering return on investment in order to make sure your initial expenditures will net you a healthy profit. For rental property specifically, determining the cap rate is key. Investopedia defines the cap rate as “the rate of return that is expected to be generated on a real estate investment property” and is represented by “dividing net operating income by property asset value and is expressed as a percentage.” Of course, now you just need to figure out what net operating income is…
“Net Operating Income = RR-OE
where:
RR = real estate revenues
OE = operating expenses”
I bet you wish you paid more attention in algebra now. Each variable can fluctuate widely depending on the property type, location, whether or not you choose to hire a property manager or do the work yourself, and so on.
Investing with Others
Full immersion is not for everyone. Luckily the information age affords several other passive investing options if you decide to invest in rental properties and would rather not roll up your sleeves and get into the nitty-gritty. If you prefer to leave due diligence and ROI to the experts, here are a few options.
REIT
Think of a Real Estate Investment Trust (REIT) like a real estate mutual fund. When several investors join forces, they can pull together more funds than they could on their own, allowing them to buy larger properties with greater potential for return. As a bonus, investors don’t have to manage the property. There are a few different types of REITs as well, focusing on property, mortgage, or some combination of both.
Crowdfunding
No longer just for getting your independent film financed, crowdfunding has become a perfectly viable investment strategy. Largely using social media, crowdfunding allows even an unproven real estate company to reach out to hundreds or thousands of people to collect smaller investments that they can plug into real estate ventures. Much like REITs, it allows for pooling of resources to make it possible to go after the big fish that smaller investors would never have a shot at.
Real Estate Companies
Just the fact that someone else would have to do the math on cap rates and net operating income might be enough to pull you toward a real estate company. An established player with expert knowledge in your chosen area of rental property investment could remove just about every headache, especially when it comes to obtaining financing, finding a property, negotiating price, repairs, improvements, tenant complaints, property taxes, and plenty more.
Big “Ifs” but Lots of “Hows”
The road to financial freedom can be treacherous, but the rewards can be well worth it. If it seems like a good fit for you, there are plenty of options when learning how to invest in rental properties.
