"Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate." - Andrew Carnegie, billionaire industrialist
In today's world, owning real estate continues to hold true as a pathway to wealth, just as Andrew Carnegie believed. Land is a limited resource, and owning a piece of it will only increase in value over time. However, not everyone can afford to purchase a property, which is why many people choose to rent. With housing prices skyrocketing, the demand for rental properties is higher than ever, making it a lucrative business opportunity.
The Benefits of Starting a Rental Property Business
There are plenty of reasons why starting a rental property business is a wise move. Consider the following:
- Rental prices have increased by nearly 50% since 2008.
- The average rental for a 2-bedroom home in the US costs $1,100 monthly.
- The demand for rent is higher than ever, with residential vacancy rates decreasing to 2.5% in 2019.
- The industrial sector is experiencing significant growth in the commercial real estate market, with a 13.4% increase since 2020.
- The demand for industrial properties has increased, leading to an all-time low vacancy rate of 4.3%.
How to Start a Rental Property Business
Whether you're interested in investing in the residential or commercial market, our 11-step guide will lead you in the right direction and help make your rental property business a resounding success.
Step 1: Decide on Your Niche Market
To begin, determine your niche market. Consider the following questions:
- What level of involvement do I want in the day-to-day operations?
- How far am I willing to commute daily to run this business?
- How much monthly income do I need for this to be a worthwhile investment?
- How often do I want to deal with finding new tenants?
- Will I pay off the property in full or require a mortgage?
Understanding your preferences and financial goals will help you identify the right market for your rental property business.
Step 2: Find Your Ideal Location
Location is crucial for the success or failure of a business. Ensure you choose a location that aligns with your property type and level of involvement. Consider factors such as ease of access, parking availability, zoning laws, market trends, job market, school district ratings, crime rate, access to recreational activities, future developments, and vacancy rate.
Step 3: Understand the Legalities of Opening a Business
Forming a legal business entity is essential to start a rental property business. Research and decide on the most suitable type of business entity for your needs. Options include sole proprietorship, partnership, limited liability company (LLC), and corporation (C-corp and S-corp). Consult with an accountant to determine the best choice for your personal liability and tax structure. Remember to keep personal and business finances separate by opening a separate bank account.
Step 4: Secure Financing
Buying property is a substantial investment. Determine your budget and explore financing options available to you. Private investors and bank loans are the two main options. Private investors may require sharing property equity, while banks typically look at your credit history and require collateral. Consider the pros and cons of each option before making a decision.
Step 5: Get a Realistic Idea of Potential Profits
Calculate your potential profits by considering total expenses and total revenue. Determine all expenses associated with running the business, including property purchase price, property taxes, landlord insurance, operating expenses, and business taxes. Estimate total revenue by researching rental prices of comparable properties in the area. Understand the return on investment for different property types, such as 1%-4% for single-family properties and 6%-12% for commercial properties.
Step 6: Find the Property That's Right for You
Once you have a clear understanding of your budget and desired location, start searching for potential properties. Utilize real estate websites and consider working with a real estate agent who has access to off-market properties. Perform thorough inspections and ensure the investment makes financial sense based on your estimated profits.
Step 7: Find Potential Renters
To attract potential renters, utilize rental websites with high traffic, list your property on social media platforms, leverage word-of-mouth through realtors and friends, and use "For Rent" signage on the property. Tailor your marketing strategy based on the type of rental property you offer and the target market you want to attract.
Step 8: Screen Tenants
Screening tenants is essential to find reliable and responsible individuals. Conduct background checks to ensure a clear eviction history, assess income levels, and review credit history. For long-term rentals, seek reliable references. For short-term rentals, platforms like Airbnb require ID verification, reducing the need for additional screening.
Step 9: Collect Rent
Establish a convenient payment system for collecting rent from tenants. Online payments are commonly used, allowing tenants to set up automatic rent payments. Ensure the process is seamless and user-friendly to encourage timely payments.
Step 10: Reinvest into Property Maintenance
Maintaining your property is crucial for tenant satisfaction and long-term success. Understand the maintenance responsibilities based on lease agreements. For long-term residential properties, tenants may report maintenance issues, which you must promptly address. Short-term rentals require regular cleaning and replenishing amenities to ensure a positive guest experience. Consider hiring a trustworthy cleaning service or property management company to minimize your involvement.
Step 11: Take Your Rental Property Business to the Next Level by Going Digital
Utilize digital solutions like Connecteam's all-in-one rental property business management app to streamline operations. Schedule employees, track hours, assign tasks, and receive real-time updates, making property management more efficient and organized.
The Bottom Line
Starting a rental property business may seem overwhelming, but by following these 11 steps, you can confidently embark on this profitable venture. Remember to research, plan, and execute each step diligently, and seek professional assistance when necessary. With the right strategy and dedication, your rental property business can thrive in today's competitive real estate market.
