Residential real estate can be a lucrative investment — one that likely won’t be going away any time soon. People will always need a place to live.
While it seems like an expensive undertaking, it’s possible to get started renting out your home or apartment without a huge amount of initial cash. Whether you want just one property as an alternate income stream or are looking to build a serious rental income empire, the same basic tactics apply.
The old saying “it takes money to make money” applies.
Rich Carey, who owns 20 rental homes in Montgomery, Alabama, suggests saving up for a 20% down payment in order to avoid private mortgage insurance. You’ll also need additional cash for any repairs and to tide you over until the first renter moves in.
To save up this initial chunk of cash, try:
Slashing your spending temporarily
Selling unneeded items
Asking for extra hours at work (if applicable) or getting a side hustle
Finding a cheaper apartment or getting a roommate
Moving back in with your parents for a short time
A clean credit history and good credit score can help you get the best mortgage rate. While you’re saving up that down payment, request a free copy of your credit report and check it for errors. Use this time to improve your credit score, if necessary.
Residential real estate investing books and blogs are everywhere, and often free. It’s also essential to learn the local landscape. Connect with other local real estate investors.
While saving for his own first property in Clemson, S.C., real estate investor Chad Carson met with local investors to learn more.
“Finding good deals in real estate is like a treasure hunt,” said Carson, author of “Retire Early With Real Estate.”
The Multiple Listing Service is a comprehensive source of properties. If you see a likely prospect, jump on it.
Other ways to find investment homes:
Tell your network that you’re looking to buy
Watch for “for sale by owner” signs
Put out a call on social media
Check the housing ads on Craigslist
Take out an ad in the local newspaper or weekly shopper
If you see a place you think has potential, consider simply asking. Carson has knocked on doors or left notes to inquire if owners might be interested in selling.
“I’ve had people call me seven years later,” he says. “It’s a long game.”
Check out our guide to buying a home.
Once you’ve found a property, do the math.
Will you have enough for down payment, closing costs, repairs and extra cash in case you don’t rent it right away? (Here are the common extra costs that come with homeownership.)
Will the rent cover the mortgage, including extra padding to cover future expenses, like a new roof or a major plumbing fix?
“Show yourself, on paper, that you’re going to make money,” Carey says.
Suppose you’ve saved everything you need to buy a place. Why not move in there yourself? You can then take your time with repairs and not have to worry about finding a renter.
“You’re getting a place to live and you’re also getting an investment,” Carson says.
Research first-time homebuyer programs — they provide help with closing costs and lower interest rates. These programs also may apply to those who haven’t owned a home for a certain number of years.
Once you’ve lived in the home for two years, you may be able to exclude up to $250,000 of capital gains upon selling if you're single, and up to $500,000 of capital gains if you're married.
If you have a spouse or partner, it’s crucial for them to be on board. Having to live amid ongoing improvements and be willing to move a couple years later is a commitment. But the potential financial benefits of flipping a home are considerable.
Ever considered renting your house for filming? Here's how.
Not everyone can do everything alone. Know your limits.
Just about anyone can mow a lawn or paint a living room, and online videos can show you how to install a garbage disposal or change out a ceiling fan. But major repairs and renovations should be done by professionals.
This applies even if you’re not living on the property. As a landlord, will you be able to respond quickly to repair issues or effectively screen potential renters? If not ...
A property management company will take a cut of the profits. But it could save you some headache (like those 2 a.m. phone calls when the toilet floods).
Ask fellow real estate investors about the property managers they use. Once you hire someone, be sure to monitor their performance. Drive by regularly to see if the lawn is being mowed. Walk through the place after it’s been prepped for a new renter. Insist on being part of the tenant selection process.
“If you are hands-off, you run the risk of being ripped off,” Carey said.
This type of coverage provides liability protection if someone gets hurt. It also protects your property against damage. If you’re temporarily unable to rent the place due to a covered loss, you’ll be able to recoup some of that lost income.
Learn more about buying landlord insurance for your rental property.
Also encourage renters insurance, which protects a renter’s property against burglary, fire, water damage or other issues.
Even a relatively small real estate investment can be a major step toward long-term security.
“Your real estate empire doesn’t have to be huge,” Carson says. “It can be a small empire and still meet all of your goals, giving you a lot of financial freedom.”
Ready to rent out your home? Here's a checklist.
Image: Jamie Street
Get essential money news & money moves with the Easy Money newsletter.
Free in your inbox each Friday.