In addition to choosing the right property , prepping the unit, and finding reliable tenants , there are always maintenance hassles and headaches. Do you know your way around a toolbox? How are you at repairing drywall or unclogging a toilet? Sure, you could call somebody to do it for you or you could hire a property manager , but that will eat into your profits. Property owners who have one or two homes often do their own repairs to save money. Of course, that changes as you add more properties to your portfolio.
As someone who says he's not at all handy, he makes it work. If you're not the handy type and don't have lots of spare cash, being a landlord may not be right for you.
Savvy investors might carry debt as part of their portfolio investment strategy , but the average person should avoid it. If you have student loans, unpaid medical bills, or children who will attend college soon, purchasing a rental property may not be the right move for now. Pereira agrees that being cautious is key, saying, "It's not necessary to pay down debt if your return from your real estate is greater than the cost of debt. That is the calculation you need to make.
Always have a margin of safety. Investment properties generally require a larger down payment than do owner-occupied properties; they have more stringent approval requirements. You may, however, be able to obtain the down payment through bank financing, such as a personal loan. The last thing you want is to be stuck with a rental property in an area that is declining rather than stable or picking up steam. A city or locale where the population is growing and a revitalization plan is underway represents a potential investment opportunity.
When choosing a profitable rental property , look for a location with low property taxes, a decent school district, and plenty of amenities, such as restaurants, coffee shops, shopping, trails, and parks. In addition, a neighborhood with a low crime rate, easy access to public transportation, and a growing job market may mean a larger pool of potential renters. Is it better to buy with cash or to finance your investment property?
That depends on your investing goals. Paying cash can help generate positive monthly cash flow. On the other hand, financing can give you a greater return. Cash flow is lower for the investor, but a While a rental property mortgage is basically the same as a primary residence mortgage, there are some key differences.
For starters, there are higher rates of default on rental property loans because borrowers facing financial troubles tend to focus on a primary home's mortgage first. The added risk means lenders typically charge higher interest rates on rental properties. Then there are the underwriting standards, which tend to be more strict for rental properties.
In general, mortgage lenders focus on the borrower's credit score, down payment, and debt-to-income ratio. The same factors apply to rental property mortgages, but the borrower will likely be held to more stringent credit score and DTI thresholds—and a higher minimum down payment.
Additionally, the lender may take a closer look at the borrower's employment history and income and want to see prior experience as a landlord. In general, here's what lenders require from borrowers to approve a rental property mortgage:.
The cost of borrowing money might be relatively cheap in , but the interest rate on an investment property is generally higher than for a traditional mortgage. If you do decide to finance your purchase, you need a low mortgage payment that won't eat into your monthly profits too much.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. Other costs include homeowners' insurance, possible homeowners' association fees, property taxes, monthly expenses such as pest control, and landscaping, along with regular maintenance expenses for repairs. Protect your new investment: In addition to homeowners insurance , rental property owners should always purchase landlord insurance.
This type of insurance generally covers property damage, lost rental income, and liability protection—in case a tenant or a visitor suffers injury as a result of property maintenance issues. Keep in mind that standard homeowners insurance policies may not cover losses incurred while the home is rented out.
Contact your insurance agent to make sure you are adequately insured. To lower your costs, investigate whether an insurance provider will let you bundle landlord insurance with a homeowners insurance policy.
It's not just maintenance and upkeep costs that will eat into your rental income. For example, there are two free ones that I like:. Retirement calculators are helpful, especially when investing in typical assets like mutual funds and stocks.
Or, you could also be more conservative with your cash-on-cash return. So, the math begins with your retirement expenses E. You decide what that number is. This is the cash yield you can expect from your rental properties. Simple math, right? Examples are always the easiest way for me to understand concepts. I bet you feel the same way.
But examples are only helpful when you understand the assumptions. You may need to adjust these assumptions to make them relevant to your situation. So, in my examples assume that all of the rental properties will have the following characteristics:. There is an endless debate about how much debt you should use in real estate investing.
Some even question whether you should use debt at all. There are positives and negatives to every investing and life decision you make. This portfolio is no different. This example, like all case studies, has more details we could discuss and debate. But I hope it illustrates one possible type of retirement rental portfolio. But the portfolio looks very different. I have used two extremes in these examples to demonstrate the positives and negatives.
In real life though, it may make more sense to mix the two which is more like what my business partner and I have done. You can and should adjust the basic principles to the reality of your situation and to your comfort level.
Financial blogger JD Roth says your current expenses and not your income are the best starting point to figure out how much money you need to save for retirement. Once you know your current expenses, you can then make adjustments like for inflation to figure out your future needs. This makes sense, of course, because financial independence means owning investments that pay your living expenses.
Free from the need to work for money, you can then do what matters. Sure, you spend less than you earn. And you probably save a lot of money too. But if you want to gain extreme confidence in your plan and possibly retire earlier than you thought, you need to know your expenses with more certainty.
I recommend scheduling a few hours on a weekend to really dig into the numbers. Will you spend more, less, or the same in retirement? Of course, that depends on your situation. What if you earn most of your income from rentals sheltered by depreciation? In addition, what if the free time and flexibility you have as a retiree allows you to negotiate much more than before?
However, when you have many months of free time, you can choose to travel during the times of year and to the places where you find good deals. There are many more examples of savings just like this. Will you have other sources of income when you retire? Or will rental properties be your only source? I tend to heavily concentrate in one sector real estate. So, an estimate of other income sources makes sense.
And if real estate investing is only a small part of your overall retirement plan, this is where you incorporate the other income streams from your portfolio. Mixing and balancing those will take some thinking and perhaps some professional advice. But real estate can be the solid and steady source of income at the core of your plan. Earlier in this article, I described what a retirement rental property looked like for my example.
I included characteristics like:. At a minimum in this step, estimate the cost, debt structure, and cash-on-cash return for your rental properties. The cost and debt structure can be figured out with your real estate agent and with your mortgage lenders, respectively. Although those yields are possible and I have achieved them, it is better to build a retirement plan on a more conservative foundation.
This upfront work is really the blessing and the curse of real estate investing. Few people will choose to do it, but that leaves you with less competition because you will! In this case, you already have 1 and 3 from prior steps, so you need to figure out 2 — the wealth to invest. The point of this step-by-step process was to focus your financial goals down to a certain number of rental properties.
Your goals may vary, of course, but I highly recommend you try the process for yourself. Will this be a perfect prediction of your retirement rental income? Of course not. A one-participant k - also known as a Solo k , Solo-k, Uni-k, or a One-participant k — is a retirement plan recognized by the IRS that covers a business owner with no employees, or the business owner and his or her spouse.
This type of retirement plan for a self-employed business owner has the same rules and requirements of any other k plan. But as a business owner, you can make contributions as both an employee and an employer.
Then, you can purchase rental real estate within your k. However, there are a few things to be aware of before using a one-participant k or an IRA to invest in real estate:. Most real estate investors periodically rebalance their rental property portfolios as they scale up and grow. To avoid paying capital gains tax on the accrued equity, owners use a tax-deferred exchange to relinquish one investment property and buy another, while deferring payment of any capital gains tax owed.
Some owners diversify from one asset class to another, as these two San Francisco Bay area investors did when they sold one large office building and purchased small rental homes through a strategic exchange. Other investors who own expensive property on the east and west coast often sell when they discover they can literally buy two or three single-family rental houses in secondary markets for the price of owning one in a higher priced market.
There are specific rules and timelines to follow when conducting an IRS Section tax-deferred exchange. However, many investors find an exchange is worth the extra effort, especially when the tax savings can be used to fund multiple property purchases. When choosing among the different options for financing multiple rental properties, one of the biggest considerations is to decide what is right for you and your long-term investment goals.
Factors to think about include:. Jeff has over 25 years of experience in all segments of the real estate industry including investing, brokerage, residential, commercial, and property management.
You can generally opt for three types of investment properties: single-family homes, condo units or multi-family unit properties. Watch for emerging markets, evaluate the zip code and neighborhood. Has a new school district been built, as well as a lot of new construction? If so, you could be on the right track toward the best possible location for your rental property. How will appreciation fit into the mix?
In other words, ask yourself whether you think the eventual return on your investment will make it worth it in the long run. Neighborhood: The neighborhood you choose for your rental property will attract a specific type of renter. School district: This is important if you plan to rent to families. A home in a good school system will allow you to charge more rent but home prices will generally be higher.
A mortgage preapproval is like a green light when you shop for a home. You give your lender information about your income, debts and assets and the lender checks your credit. DTI is your monthly debt payments divided by gross monthly income. Need to improve your credit score? Learn some tips. Stay away from big banks: Big banks might not readily loan to you as much as a small bank or offer you desirable loan terms. Compare both big and small banks side-by-side prior to landing on a lender.
Ask for owner financing: Owner financing means that the seller agrees to accept payments directly from you instead of requiring you to get a mortgage.
This can benefit both you and the seller, but there are risks involved. Think through this option before you take the plunge. A rental property could be a sound investment, particularly if the rental income you collect offers you some extra income. How We Make Money.
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