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Make More Money with a Rental Property

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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).

Sample Operating Income Calculation

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! 🙂

Money Passive Income

AUTHOR Derek

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.

19 Comments

  1. I really like to own my own rental property when the right time comes. I also think that it’s a great investment that can give me some money for the years to come, that’s predicting that I’ll have one soon. 🙂

    • Sweet. Sounds like we’ll have something to talk about soon. I plan to own a rental at the end of next year (or the beginning of the following year).

  2. @Derek- Great post! I’ve been considering getting a rental property for additional income. But first, I need to pay off my mortgage. Still have about 10 years for that!

    • Thanks Monica, and thanks for all the comments lately. I love them! I bet you could pay off your mortgage faster – we just need to get you some income from your new website! 🙂 Don’t worry, I’ll help!

      • @Derek-Yes exactly! My goal for any extra income is to pay off my mortgage as soon as possible. Thanks for your advice. Getting starting on my blog is fun and exciting! Lots to learn

  3. This post comes at a really great time for me. I am really trying to get into real estate investing. Though I would like to get into rental properties I am looking to flip my first couple to have some cash on hand to buy those rental properties. I really like the way you show the breakdown. I would like to make more money then that but if you are getting the mortgage paid and coming out positive that is great for the long term.

    • Glad I could help out! I have some close friends that have been talking about rental properties as well, so I thought that I would help them out with some quick tips on what to look for. Best of luck in your search!

  4. This is one very informative post, Derek. I do consider a rental property a big and safe investment and if I’d have enough money, I would definitely want to invest on real estate business.

  5. Hi Derek,

    Thanks for detailed breakup.. I would also like to know how much yield in terms of percentage should be good enough w.r.t. capital invested in the second property?

    • This is purely up to the investor, but if it were me I would want at the very least a 10% return. What were you hoping for?

  6. The part of India where I live, rental yield is 3-4% per year however capital appreciation is 10+ % ….However housing bubble is building up & you never know when it will burst…People like me are waiting forever to invest in real estate 🙁

    • Houses shouldn’t really be purchased as an investment with their value alone. You should be focusing on the cash flow that they provide. If you do this right, then you should never have that bubble burst on you. 😉 Best of luck to you and your investments.

  7. Thanks Derek for valuable advice.

    • You’re welcome! Always glad to help.

  8. Derek, I’m have not completely paid of my house I don’t think that is key. I started in 98 a fixer upper and worked my way up to a 6bed/3 bath in 16 years, now I own four homes all with legal granny units in the rear and I’ve been living for free, plus 1000 income for three years. I save more money now then ever. It’s in real.
    Keys
    -be bold
    -build it first & be involved
    -keep your standard of living when you make more money
    -study rates, how money works, how your credit and credit cards work
    -learn the power of leverage
    -define what you want and need “consistently” every time you buy something

    • It sounds like you have a good head on your shoulders David. Your plan obviously works and I wouldn’t discount that. For me, I plan on taking care of my mortgage first so I can buy deeply discounted properties with cash. This is just one of many models and I commend you for your success. Thanks for the comment!

  9. Derek , I’m going you this conversation to thank you for your web site it’s amazing. And now I love your personalization to each one of us. I’ve been a guru of Rich Dad Poor Dad, Suzy Orman, and others and now you are on my list.
    Thank you!
    -this site is so rewarding to me.

    • I’m very happy that you’re adding me to your list of favorites! I’m glad that you are enjoying the site. Hope to hear from you for many years to come! 🙂

  10. Example:
    1 house 2010
    Worth –300k in 4 years 350k net worth increase by 50k
    Loss of growth because
    Balance is 50k worth 300k because you pay off

    2 homes
    300k n 300 k double your net worth
    Rebalance
    125 and 125 loan each home
    Loans at 175 each-mortgage at ~1230
    2460 PITI if you can rent for 75% of that you put the difference and can still save.
    In four years you made 50 k more cause you own two
    In four years so much happens.
    Situational for sure!
    Just thought I share.


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