Purchasing a property and renting it out is one way to begin investing in real estate, while also generating a steady stream of passive income.
Your Beginner’s Guide to Becoming a Landlord
In an era of index funds and robo advisors, you probably wouldn’t expect millennials to be interested in investing in real estate. Whether it’s a lack of capital, little knowledge about the market or just feeling helpless about where to start, real estate investing can seem like a secret club for a select few. But from 2000-2016, real estate outperformed the stock market by almost 2-to-1. And in a survey of more than 2,000 adults in the U.S. (ages 18 and older), millennials were the only age group to correctly guess that real estate did, in fact, perform better than stocks. Millennials were also overwhelmingly likely (63%) to say they would invest in real estate if technology made it easier to do so.
Given that today the median age of a first-time homebuyer is 32, and that in 2017 millennials represented the largest segment of first-time buyers in the U.S., it seems this segment is comfortable with real estate investments.
Crunching the numbers
Since 2012, rents in the U.S. have increased by 19.6% — which, depending on where you live, can be bad news for renters but good news if you’re looking to move to the other side of the rental market. Just as homeownership is more attainable than many millennials initially think, so too is buying a rental property for many millennials with the right financial portfolio (and enough research and preparation).
Unlike buying a home for yourself or your family, there are a number of factors to take into account when you’re trying to find the right rental property. First, you’ll want to analyze the numbers and figure out how much money you will be able to put down — at least 30% is a typical amount for rentals to remain competitive in the real estate market and attractive to lenders.
Next, you should calculate the total cost of purchasing the property. This number should take into account renovations, as well as other expenses like property taxes, insurance and the mortgage. So, for example, if the contract price of your house is $700,000 and you anticipate $12,000 worth of renovations plus a $28,000 closing cost, the total property cost is $740,000.
When pricing your property, you should do your research and see how comparable units are priced in the area. Resources like Rentometer or Zillow Rent Zestimate can help eliminate some of the guesswork. These sites analyze the data you provide — like purchase price and expenses — and then suggest how much rent to charge by comparing it to other listings on the market.
Managing the property
Once you find the property and know how much rent you’ll be able to charge, the next step is actually filling the space. Do you want students who will likely sign shorter leases or long-term tenants who are likely to renew for two or three years? Answers to these questions will impact the vacancy rate you can withstand and your cash flow.
Gone are the days of landlords manually tracking down rent from their tenants: A proliferation of real estate apps has cropped up to help accommodate the changing preferences of homebuyers (of which millennials make up a large share), conveniently making it easier to find and screen tenants and also manage maintenance requests.
Some apps can help screen the rental history of potential tenants. If you’ve advanced to the stage of managing multiple properties at once, other apps let a landlord add multiple property profiles at once.
Once you have tenants the real work begins. From maintenance requests to collecting rent, staying on top of rental properties can quickly turn into a full-time job. Indeed, there are even apps that can help property managers keep track of rent payments and maintenance all in one place — so you aren’t chasing tenants for late payments or fielding one-off requests on the fly.
If you’re looking to generate passive income, buying a property to generate rental income can be a good option. Justin Pierce, a real estate investor and agent sums it up like this, “Rentals provide three powerful wealth-building forces: rental income, asset appreciation and mortgage [assistance].” The key is being smart about the numbers before you buy and leveraging the right technology to make sure the income is really as passive as possible.