What are rental properties? Investing in rental properties is buying real estate, like houses or vacant lots, to rent them to tenants. This creates a regular income stream from rent payments and potentially allows for capital gains if the property value increases over time.
Rental property investing is a smart move for establishing a long-term source of income. The property itself can make you money while you pursue your own goals, career, and interests. You can book hospitality guests through vacation rentals like Airbnb or VRBO, you can set up long-term rental homes, and you can even book empty lots for leased parking for RVs, boats, or cars.
Each type of rental property offers a different range of benefits and has a unique management profile. You can also enjoy the fact that the property appreciates in value. No matter how it is used, you can usually sell it later at a higher value than your original buying price.
This article can serve as your essential guide on how to get started with becoming a real estate investor.
Buying for Rental Purposes
When looking to buy rental properties, it’s important to think ahead about how the property will make you money. Some locations are ideal for vacation rentals but not for long-term rentals; some provide superior parking rentals. Some have a little bit of everything, and it’s up to you to decide how to allocate the space. What makes a profitable investment property? The following list will help you explore how to choose real estate based on your plans to manage the property and collect rental income.
1. Understanding Rental Investments
Rental investments occur when you buy real estate with plans to rent it out. There are several available rental strategies below are three popular options, and each should be considered when looking for properties to invest in.
Parking Rentals: Turning vacant lots into parking or RV storage can provide a quicker ROI than traditional rental properties making it a good investment. Usually, vacant lots have a smaller purchase price, and a lot less upfront cost and maintenance so you can get a return on investment quicker. By offering RV parking, boat storage, or commuter/tourist parking in high-demand areas like inner cities and near recreation spots you can fit anywhere between 5-50 vehicles depending on the size of the space.
- Pro: Low Maintenance: A significant advantage of owning a vacant lot and using it as a storage area for vehicles like RVs, boats, or cars is the low maintenance requirement. Unlike residential rentals, you don’t have to worry about regular cleaning, repairs, or property upgrades. Plus, with platforms like Neighbor, you can efficiently manage bookings and monthly rent payments, further simplifying the process and getting you to cash-positive quicker than most options.
- Con: Potential Liability Issues: Like any rental property, a potential disadvantage of this business model is the risk of liability issues. It’s important to have clear agreements with users about their responsibility for the vehicles they store, and you should consider appropriate insurance coverage to protect yourself from potential liability.
Vacation Rental: Vacation rentals are often done through peer-to-peer hospitality platforms like Airbnb and VRBO. These make it possible to offer condos, houses, cabins, and other residential spaces as hotel room alternatives. You book nightly for a high rate of returns, but these properties also require more intensive and daily management.
- Pro: Potentially Higher Returns: One significant benefit of owning a vacation rental and using platforms like Airbnb is the potential for higher returns compared to traditional long-term rentals. Vacation rentals often have higher per-night rates than long-term leases. If your property is in a popular tourist destination and stays booked consistently, this can result in significantly increased revenue.
- Con: Greater Management Intensity: A significant downside to owning a vacation rental is the increased management workload and operating expenses. Unlike long-term rentals or vacant lots turned into parking where tenants generally stay for months or even years at a time, vacation rentals can have guests coming and going every few days. This means more frequent cleaning, more frequent communication with guests, managing booking calendars, and dealing with a higher potential for damage or misuse of the property. Additionally, you’ll need to comply with Airbnb’s policies and customer service expectations, which can be quite demanding.
Long-Term Home Rental: Long-term rental units are homes and condos rented to be someone’s permanent home. Leases are usually for the year. Managed properly, long-term rentals are nearly passive income, except for your obligation to provide timely repairs and manage turnover when tenants leave. It also waxes and wanes with the housing market.
- Pro: Long-Term Appreciation: One major advantage of owning a long-term rental property is the potential for property value appreciation over time. While rental income is often the main focus, the increasing worth of the property itself can represent a substantial gain when you decide to sell. This long-term appreciation can act as a form of wealth accumulation.
- Con: Potential for Vacancies and Tenant Issues: On the downside, owning a long-term rental property can come with the risk of prolonged vacancies and tenant issues. If a tenant moves out and the property is not immediately rented again, it may result in a loss of income until a new tenant is found and leaving you to cover multiple mortgage payments. Additionally, dealing with difficult tenants who may damage the property, not pay rent on time, or create other problems, or eviction processes can be time-consuming and stressful.
2. What Sort of Rental Property Should You Buy?
How do you choose the right property for an investment opportunity? It depends on the type of rental you want to manage and the investment strategy you have. For vacation rentals, you are looking for move-in ready homes that can quickly become profitably cozy for guests. For lot rentals, your primary goals are demand, parking appeal, and vehicle accessibility. In long-term rental homes you are the landlord and have the hassle of keeping up with repairs unless specifically said in the contract.
Parking Rental Properties
Parking rentals are a unique property type. Rural lots near natural attractions make great RV rental spots, while downtown lots are desirable for renting parking spots where demand is high. Look for land that is already evenly graded, ideally paved or with gravel, or easily modified to provide safe parking conditions.
Long-Term Rental Properties
The best homes for long-term rentals are family-friendly. You are looking for single-family homes, condos, multifamily or ‘plexes (duplex, triplex, etc) in welcoming neighborhoods. Look for high-value neighborhoods and proximity to good schools and employment centers.
Vacation Rental Properties
Vacation rental homes have different criteria. Instead of proximity to schools, look for proximity to recreation centers. You can also use smaller and strangely designed spaces that, when nicely decorated, can still make a cozy vacation spot for temporary visitors. This is a great way to find savings on otherwise high-quality properties in desirable locations.
3. Financing Your Rental Property
How do you finance a rental property purchase? Buying a house, condo, or land for the purpose of investment property is not like taking out a mortgage. You will need to take out an investment mortgage or seek alternative loan types to fund your investment property acquisition.
- Investment Mortgage: If you take out a traditional home loan from a bank (mortgage) for an investment property, you will need at least a 20% downpayment. However, you will not need private mortgage insurance (PMI).
- Hard Money Loan: A hard money loan is a high-interest personal loan using the house as collateral. These are more practical for fast-flip investments rather than long-term property rental plans.
- Home Equity Loan: You can use up to 80% of the equity on your current home to purchase investment property.
- Private Money Loan: Private money loans are person-to-person. You can join networked property investment groups to put together private funding for your next property purchase.
- Multi-Family Loans: If you are buying a multi-family property to rent (ex: apartment building or townhouse row) you can access a few unique types of loans as part of the larger investment.
4. Preparing Your Property for Rent
Once you have chosen a property, build a game plan that will transform it into the perfect investment rental.
For vacation rentals for Airbnb or VRBO, you will want to furnish the space to become a cozy hospitality experience. You’ll want to go through the usual list of touch-ups, repairs, and modernizations. Replacing old appliances and plumbing fixtures can be a great way to quickly and affordably modernize a low-cost investment house. Include essentials like toiletries and towels in the bathroom, pans, and dishes in the kitchen, and cozy details like extra pillows and blankets on the couch. Lastly, make sure it’s clean, no one likes showing up to vacation and finding they’ve got a mess to clean first.
For parking rental, consider what amenities would be useful given the environment. This might be painted lights, security cameras, or a secure fence. Ask for what they would like or what would make them feel safer. Depending on what add to your vacant lot will make your parking guests most comfortable.
For long-term rentals, you want to create a space that is also warm and inviting. It should be a blank page where a new family of tenants can start the next chapter of their story. You’ll need to repaint the walls and trim, replace damaged flooring, and make sure all the appliances are working properly.
5. Managing Your Rental Property
Managing a rental property requires two halves of an equation. The first is attracting and signing renters. You will want to market the space promptly which ensures new tenants very soon after the last leave. This is called the marketing and “turnover” process. Set a reasonable price, list your rental in visible and relevant places, and lightly screen applicants who wish to occupy your space.
The second half is tenant management. You will want to keep each property in top condition and make sure someone is available to answer their questions or provide solutions in an emergency. Manage your bookings wisely and take care of any maintenance tasks between tenant stays whenever possible.
6. Understanding Legal and Tax Implications
Running a rental property is considered a privately owned business, and is taxed as such. To navigate how to handle your income and the related tax with an investment property, your best bet is to work with professionals who have experience in this area. This will help you navigate how to file your taxes based on the property you choose and how you run it to generate business income.
FAQs
What are the tax benefits of owning a rental property?
Rental properties offer several tax benefits. You can deduct property taxes, mortgage interest, repairs and maintenance expenses, insurance, and depreciation. You can also deduct travel costs associated with the property and the cost of services such as property management. Remember, it’s always best to consult with a tax professional or accountant to understand fully how to navigate the tax implications of owning a rental property.
How much should I budget for maintenance and repairs on a rental property?
A common rule of thumb is to budget 1% of the property’s value per year for maintenance and repairs. However, this can vary widely based on the property’s age, condition, and location and if it’s a vacation space, long-term rental, or a vacant lot. With homes, some years might require minimal repairs while others might involve significant expenses, such as a new roof or HVAC system. While with vacant lots used for storage or parking, there will be significantly less maintenance and repairs. It’s important to have a financial cushion to accommodate these expenses as they arise.
What are the advantages and disadvantages of short-term rentals versus long-term rentals?
Short-term rentals, like those listed on Airbnb or VRBO, can potentially yield higher income than long-term rentals due to their higher per-night price. However, they also require more active management—handling bookings, cleaning between guests, and maintaining high service standards. In contrast, long-term rentals and vacant lots turned into RV storage or parking provide steady, predictable income and require less daily management.
How can I determine a fair rental price for my property?
Research rental prices for similar properties in your area to get a sense of the market rate. Websites like Zillow, Craigslist, and Rentometer can provide this information while apps like Airbnb and Neighbor provide suggested pricing so you can be sure you’re keeping up with demand. Factors that affect rental prices include location, property size, condition, and amenities offered. It’s also wise to consider local economic conditions, including the supply and demand for rental properties.
What are the risks involved in investing in rental properties?
Investing in rental properties comes with potential risks, such as property damage, non-paying tenants, and periods of vacancy that reduce your rental income. Market conditions can also change, affecting property values and rental rates. Other risks include unexpected maintenance costs, legal disputes with tenants, and changes in laws and regulations affecting landlords. It’s crucial to thoroughly research and consider these risks before investing in a rental property.
Investing in rental properties is a commitment that requires thoughtful planning and a strategic approach. It’s a journey that entails understanding various rental types, their respective benefits and challenges, and choosing the one that aligns best with your investment goals and risk tolerance.
If you’re considering vacation rentals, you’re entering a space with potential for high returns but also a significant management workload and upfront cost. Properties in tourist-heavy locations tend to perform well but come with a more expensive price tag. Always account for the costs and time involved in property maintenance and guest communications.
Vacant lots and parking rental properties are great investment opportunities for those looking for a low-maintenance, passive, and profitable investment. The demand for parking spaces is increasing as more people own recreational vehicles (RVs) or collectible cars and need secure places to store them.
Long-term leases, while requiring substantial initial investment, can yield steady monthly income and potential property value appreciation. The challenge lies in property management, finding reliable tenants, and mitigating the risk of prolonged vacancies.
Long-term Investment
Finally, as you venture into this exciting but challenging world of rental properties, remember that success isn’t overnight. It requires patience, continual learning, and a willingness to adapt to market trends. However, with a careful selection of properties, smart financing, diligent preparation, and efficient management, you can build a profitable and sustainable rental property business. Investing in rental properties isn’t just about creating another income stream – it’s about creating wealth and financial security for years to come.
