Have you ever wondered how you can make more money than you do right now? Some of you want to make quick money because of a recent emergency. If that’s the case, I would recommend reading my book, “101 Ways to Make More Money“. If, however, you are looking to increase your income and cash flow for the long term, then perhaps real estate investing is for you. Once you learn the basics, you can certainly make more money with a rental property.
Think Like a Renter
If you weren’t in a position to buy a house and had to rent, what would you be looking for? You most likely wouldn’t be looking to stay in a rental for decades to come, but you still want to live in a safe area for a reasonable price. In order to purchase a property that will be in demand from renters, you must first understand the rental market. More specifically, there are three main drivers for an in-demand rental property.
Three Drivers of an In-Demand Rental Property
There will always be individuals and families that need to rent a property for a place to call their own, but will they want your property? That is a question that you most definitely want answered before you invest. To answer this question, let’s take a look at the three main drivers of demand.
1) Employment – Is there strong employment in the area that you’re looking to buy? If factories are closing down all around you and work is shifting elsewhere, then you most likely should not invest in that property. If, however, there is new construction nearby that will increase the jobs in the area, then your rental unit will most likely be in high demand.
2) Population – The best rentals are located where the people are. If you want people fighting over your rental property, you just need to place it in an area where people love to be. Sure, there are some rentals on the outskirts of town, but the demand for these places are pretty low. It is much more convenient for your renters to be in or near the city. If possible, find a rental property near sports stadiums, universities, and in redevelopment areas.
3) Location – Ideally, you want your rental to be in an area of low supply and high demand. In other words, you want to have one of the few rentals in an area where everyone wants to be. Great locations have drive-by visibility, they possess a rare quality (like a waterfront view), and most importantly, they are in demand.
Will You Really Make Money With This Investment?
One of the largest hang-ups for new investors revolves around operational income. Sure, you might have found a property that is near employment, has a large potential population that’s interested in renting, and has a great location, but will this property be profitable? Once you find that potential property, I would suggest that you run your investment through these three steps to see if it is truly a good investment:
Step 1) Verify Property Income – If this property had been rented out in the past, I would recommend getting confirmed documentation that shows what the actual income was for this property within the last year. In other words, how much did the property owner make before any expenses were factored in? If there are no records, do your due diligence to find out what the going rates are for rentals in your area. If you expect your rental to bring in $1,000 a month, multiply this number by 11 (assume for at least a one-month vacancy each year) to get your net rental income.
Step 2) Verify Expenses – It is sometimes difficult to estimate expenses on a future property, but if anything, make your estimations high. Factor in potential repairs and maintenance, utilities, real estate taxes, insurance, mortgage payments, and the replacement reserve (for appliance replacement, carpet replacement, painting, etc.).
Step 3) Calculate Your Net Operating Income – Once you figure out your estimated net income and your net expenses per year, you can very simply calculate your net operating income. Just take your yearly net income and subtract your yearly expenses and you’re left with your net operating income. Hopefully you’re left with a positive number here. If it were me, I would make sure that my operating income was at least a 10% return on my investment (in this case, my down-payment).
Many concepts and ideas within this article have come out of the book, “The ABC’s of Real Estate Investing” by Ken McElroy. If you’d like to learn more, I suggest that you read the book! 🙂
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.