How to Start Investing in Rental Properties — Your Step-by-Step Guide

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If you’re thinking about investing in the rental housing market, you may be wondering how to get started. Like many new investors, you probably have an optimistic vision for your new investment property: reliable tenants, passive income and eventual financial freedom. But how do you get there from where you are now? Like everything else, you start with the basics. Understanding even the rudimentary principles of rental real estate can help you kickstart a successful investing career.

This includes knowledge of property types, return on investment, mortgages and the legal steps to acquire a property. The research you do up front may help you avoid a misstep that could sink your investment. Here’s how to get started with rental real estate investing:

Related: 5 Tips for New Investors Who Want to Make Money With Real Estate

Deciding between a residential and commercial property

Before you buy a property, you need to decide whether you’re looking to purchase residential or commercial property. Both types can help you reach your end goal of passive income. However, they have some important distinctions.

Assessing property value

Now that you’ve selected a property type, you need some options. Maybe you’ve chosen a neighborhood or a few properties you’re considering. How do you know which one is your best move financially? Here are two crucial factors to consider when assessing property value:

Related: Getting Your Feet Wet in the Rental Property Business

Following the 1% rule

Qualitative factors are one way to measure return on investment, but you should also have the numbers to back up your assessment. Will the property generate consistent rental income? Or will the property ultimately require more time and money than it can return to you? Fortunately, there’s a rule of thumb for assessing the strength of an investment that you can apply before you make it.

The 1% rule holds that if you can reasonably rent a property out at a rate equal to one percent of the starting mortgage, it’s likely to be profitable. You should know whether the rate you’ve calculated is reasonable based on demand and the rates of similar properties in the area.

Let’s say you buy a duplex for $310,000. You make a 25% down payment, equal to $77,500. That leaves you with a $232,500 mortgage. One percent of this remaining mortgage is $2,325, which halved is $1,162.5. If you can rent both units of the duplex for around $1160, the property is likely a good investment.

The 1% rule is a quick trick for evaluating the potential of an investment. However, it should not be taken as a definitive verdict. The soundness of any investment depends on many factors, including your current cash flow, the property’s condition, property tax rates, locational trends and other factors. The 1% rule will get you in the ballpark, but do your due diligence.

Financing your property

Finally, you’ve chosen a property. If you’re like most investors, you’ll need to borrow money to purchase it. This means finding a mortgage lender, negotiating terms and making a down payment. Let’s break down mortgage types, down payments and interest rates:

Related: How to Get the Most Out of Your Rental Property Investments

Legal checklist

As the buyer, it’s your job to get ahead of a purchase before any problems arise. Here’s what you should do to ensure your investment is properly protected before you make it official:

Every successful investor started exactly where you are now. The research and dedication you devote up front can help you achieve financial freedom, too. You’re now prepared to buy your first property and get started in real estate investing.

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