Rick Nayar bought his first rental property at the age of 27 – and was 25 by the age of 30.

Owner of the Orlando, Florida-based Centurion Realty Group, Artesian Title and Full Circle insurance companies, Nayar saw real estate investing as a great opportunity to build wealth and generate monthly cash flow.

Since 2003, Nayar has bought, rented, sold and returned over 1,000 homes.

Investing in rental property however is not for the faint of heart, but with due diligence and the following tips are worth considering.

“Look for proximity to major roads, public transportation, and most importantly, schools,” says Abhi Golhar, host of Real Estate Deal Talk in Atlanta.

Look for rents in the area you want to search, both within the state and with repairs or upgrades, adds Chris Taylor, a broker with Advantage Real Estate in Boston.

“I find the biggest mistake investors make is overestimating the value of their property, which translates into vacant homes and below market rents,” Taylor said.

You also want to enter the minds of your audience: if you’re in a college town, for example, it’s important to know how students think, the maximum distance they are willing to be from campus, and the places they are. they see it as ideals, Taylor says, so you can buy a property that will be in high demand.

Start small. Start with an affordable initial investment like a single unit or duplex versus an entire building, says Ryan Coon, founder of Rentalutions, an online property management platform for DIY homeowners.

“That way, if things go wrong and you can’t afford a mortgage or maintenance, you don’t run the risk of going bankrupt,” he says.

Because you are just getting started, avoid properties that need major repairs, as these could cause you to overextend.

Consider hiring a property manager and ask friends to recommend lawyers, contractors, and other real estate professionals who can help you and will become valuable contacts over time, says Coon.

“The most important consideration for potential homeowners is to accurately estimate rental income and the costs associated with the rental,” said Lucas Machado, president of House Heroes, a South Florida real estate investment company. “Until a homeowner has a clear idea of ​​these issues, they risk owning a property that – rather than a profitable investment – represents a net loss every month.

Betting on appreciation alone is not a good idea.

“Lease purchases should have positive cash flow and a good rate of return,” Machado says. This could be anywhere from 8 to 15 percent in a residential market. Investment real estate is often valued by its capitalization rate (cap), which is calculated by taking net operating income divided by the prevailing capitalization rate in the neighborhood to arrive at an appropriate price.

Your monthly expenses will include mortgage or debt service, taxes, insurance, lawn and pool maintenance, property management (optional), and insurance. A deposit of at least 20% will likely be required to finance the purchase.

Vacancy, turnover and eviction are realities of renting any property, so savvy landlords should assume at least one month of lost rent per year, Machado said.

Don’t upgrade the property too much. To keep your cash flow at peak levels, don’t spend too much money on improvements to a rental property that will likely need maintenance and repairs during rotations anyway.

“The best advice I ever received was to imagine a box of minimum standards and never get out of it,” says Nayar.

This keeps your monthly rent at an appropriate ratio of around 1.2 to 1.4 times the monthly cost of ownership, with plenty of cushion.

Because maintenance is also a matter of course when you own a rental property, Nayar buys a home warranty that costs $ 500 per year to better distribute the cost of repairs.

“I give the tenant the information and let them know that they will have to pay a $ 35 deductible directly to the company whenever they need to do something,” Nayar said. “You will be shocked at how much this takes the trim off in terms of maintenance. It is important that you are upfront with tenants about this and that you set that expectation.”

Consider what type of maintenance is required depending on the type of property you are buying. For a single family home, the owner is usually responsible for things like mowing the lawn and snow removal, but if you are buying a condo or townhouse, this maintenance is included in the condo fees, resulting in a longer process. manual, says Taylor. .

Choose tenants wisely. Dealing with tenants can be stressful, but it doesn’t have to be. “A final critical assessment is whether the buyer intends to manage the rental themselves. Are you ready to thoroughly screen candidate tenants and assert yourself in difficult tenant situations? Says Elizabeth Gibson, content manager for ezLandlordForms.com.

“An owner needs thick skin,” she says. “If you are likely to falter with applicants who are not qualified, or with late rent payments and other lease violations, you may need to hire an agent. [property manager] to protect your investment. “

The renter’s income should be at least three times the rent and verified by having a form signed by his employer, says Nayar, which will hopefully minimize vacations and eviction losses.

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