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Buying Rental Homes and Renting Them For Profit: Making Money in Real Estate

What to look for when you purchase a residential rental and how to make money on rental property. How to be a landlord.

Making money in real estate is not a get rich quick scheme, but with a little know how and a lot of hard work it can be a great way to earn extra income and secure your future.

Finding the right property will be relatively easy, saving the 20% to put down on it will not. That’s right…do not even attempt to purchase a rental without saving a down payment equal to 20%. Even if you can get a loan…and the chances would be slim in our current economic climate…the terms will be much too costly to make it worth your while.

Look for a two to three bedroom home in a neighborhood that is safe and has good schools. Older, established neighborhoods are perfect places for rentals. Check prices, even in California you can find a decent home in a great rental neighborhood for less then $150,000.

Before you purchase the home, check other rentals in the area. Don’t assume you know what something is renting for – call realtors and do comparisons on a site like Ziply.com. After you find out what the going rental rate is, calculate what your payments will be for the mortgage and how much you will have to pay for insurance and property taxes. Calculate your payments based on no more than a 15 year loan. You do not want a 30 year mortgage on a rental. The quicker it is paid off the sooner you will have income.

Do not purchase the home if the rent will not cover 120% of the costs. You will want to put away approximately 20% of what you are taking in on your rental for emergencies – the heater going out, the roof leaking – these things happen and you need to be prepared.

After you purchase your home make sure it is safe, clean and livable. You do not need to do major remodeling as you will not be living there. Again, the home needs to be safe, friendly and clean…not the Taj Mahal.

When you are ready for renters advertise in print newspapers and put a sign on the lawn. Do not jump at the first caller. Take names, have prospects fill out rental applications, run credit checks and call references. Get permission to call employers – they are usually more honest than references. Think about it…when you put down someone as a reference…have you ever included the name of someone who is likely to deface you or say anything negative? Neither will your future tenants.

When you do get a renter and he/she turns out to be clean and responsible, don’t keep raising rent just because you can. Value your renter and try to keep him or her happy. It will pay off over time to not have a lot of turn over.

Be careful of homes that require a lot of work before you can rent them out. Fixers are often not worth the reduced price. A great deal is not truly a great deal if the location is less than desirable. Check the crime rates in prospective neighborhoods and talk to the neighbors.

This may sound hypocritical, but it is much better to buy a home in a neighborhood with few rentals. Homes are more valuable and tend to hold their value in owner/occupied neighborhoods. With this said when you buy into one of these neighborhoods it is essential that you keep your rental looking owner/occupied. This means either doing the yard yourself or putting a clause in your rental agreement requiring upkeep as a term or condition to rent.

Everyone needs a place to live, in good economic times and bad, home rentals in the right location will rarely be vacant. It cannot be overemphasized however that being a landlord can be hard work, but there is no denying the benefits of someone else contributing to your retirement.

Think about it…you put down 20 percent, someone else pays 80 percent, after ten to fifteen years you have a property free and clear and you have a steady source of income.

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Comments (1)
Jonathan Wood

You're right to raise the issue of ensuring the rent pays for more than just the mortgage to handle unplanned expenses such as repairs and time the property may go unrented. Another approach is to subtract a percentage of the expected rent to cover these expenses (I suggest 20 - 30%, depending on how likely the property is to need repair and how conservative you'd like to be).

In my experience, the key to minimizing the chances of failure are to run the numbers as realistically as possible before purchasing the property.

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