The real estate industry has produced more wealthy people than any other industry in the history of the world. Forbes, in fact, estimates the number of billionaires the industry has produced to be a staggering 163 – the third most of any billionaire–producing industries.
But there is more that goes into real estate investing than just buying a property. To succeed, you need to learn the ropes of the business.
If you came here looking at how you can grow your passive income stream with a rental property, you’ve landed at the right place. Below are 5 tips from Paramount Management in Phoenix to help you in that regard.
Sadly, this is where most newbie investors usually go wrong. They make rash decisions that end up costing them a fortune. To avoid this mistake, you must perform ample research on which property to invest in.
And if you are still new in the real estate arena or simply don’t understand the local real estate market, then hiring a professional might be in your best interest. An experienced agent will help guide you on what type of property to buy to generate the best ROI.
Don’t limit yourself when it comes to location. With an investment property, you can essentially invest wherever you want. Remember, this is an investment and the primary goal is to make as much return as possible.
Having the option to invest elsewhere other than in your local area can help you find great investments that you would have otherwise not known existed.
Generally speaking, there are two golden rules when it comes to buying out of state investments:
Now, you will need good contacts in the area to make your investment plan successful. Usually, a real estate agent or a property management company will suffice.
You may also want to use this opportunity to meet with various lenders in efforts to get pre-approved.
Investing in just any type of property wouldn’t do the trick. What you want to buy is an investment property that has potential for high cash flow.
To determine your cash flow, you need to calculate your potential rate of return. While there are many ways to calculate the rate of return on an investment, many experts agree that anything above 10% is great.
Let’s take an example using the cap rate calculation (Cap Rate = Net Operating Income/Purchase Price x 100%).
Suppose you bought your investment property for a total of $150,000. Assuming you rent it out for $1,500 a month, thatwould bring the annual rental income to $18,000. And in regards to property expenses, like property management, maintenance, property insurance, property taxes, etc., let’s assume they total to $2,000 for that year.
Now, the rate of return based on the cap rate formula becomes ($16,000/$150,000 x 100%) = 10.66%.
Anyone can become a property owner, but not simply anyone can become a property manager. Before deciding to manage your property, you need to determine whether or not you have the requisite skills to take on the job.
Below are a couple of questions to help you gauge your landlording skills:
You will be able to determine your suitability depending on how well you answer these questions.
High quality tenants and a consistent income stream go hand in hand. In other words, if you are looking to grow your passive income stream, then you will need to find high caliber tenants.
High caliber tenants are those that pay rent on time, care for the property like their own, notify of emergency issues on time and rent long-term.
How exactly do you land such tenants? Well, by thoroughly screening every prospective tenant that shows interest in your rental properties. That is, one that looks at every applicant’s creditworthiness and income, as well as criminal, rental and employment background.
There you have it. Everything you need to know to grow your passive income stream with rental properties. If you need more help, seek professional guidance.
Content for this article is attributed to Danielle Marshall at Paramount Management & Realty.