What you need to know about Rental Income

Investing in rental properties is a great starting point for real estate investors.

Rental properties can provide cash flow and generate value from appreciation. Investors also get tax incentives and deductions from owning real estate.

While it can be a lucrative method of real estate investing, there's a lot to know before investing in rental properties. This article will show you how to start investing in rental properties as a beginner.

You will learn what it takes to invest in rental properties, common mistakes to avoid, and things to know before you buy your first rental.

Residential rental properties are often more accessible to beginners because they're less expensive. Less money is required upfront and that often means that it's easier to get financing.

While there are exceptions, residential rental properties are also typically easier to manage. In most cases, managing one tenant is easier than managing twenty.

Most investors buy a rental property with the goal of producing positive cash flow -- earning more income each month than they spend on expenses. Not every rental has a positive cash flow at first, but building up to one is a common goal of rental investing.

Owning a rental property is an active form of real estate investing and requires time, dedication, and involvement. Being a landlord isn't for everyone. As you'll see, there's much work involved in identifying, analyzing, buying, and managing a quality rental property.

Do you think investing in a rental property might be a good idea for you? Keep reading to find out where to start and how to best prepare yourself for the project at hand.

Buying rental property is a huge financial decision you can take. What you want is property that will help you generate sufficient income in the years ahead with minimal stress.

To help you stay on track when shopping for rental property, there is need for you to understand how the game is being played.

The Pros of Buying a Rental Property.

A rental property is a tangible asset, which explains why more Nigerians are embracing it as an investment option. The followings are the highlighted benefit of rental income

1. Most property have a strong tendency to appreciate in value with the passage of time. This means that the value you get from a property appreciates often. There is a huge tendency to get a higher value within a passage of time.

2. When you buy a rental property, it becomes a source of income for you. In Nigeria, rent is paid by your tenants on a yearly basis as opposed to monthly rent.

3. You don’t necessarily need to have the total value of a property to own it. There are several arrangements that allow you pay only a fraction of the value of the house. Instead of buying a complete building, a portion of it could be sold you. Like a property worth ₦50million, you can be a part of it with just ₦5million.

The Cons of Buying a Rental Property

There are certain downsides to owning rental property and they are things you should bear in mind as you make your decisions to buy.

1. When you buy and own a rental property, there will always be a risk of renting your property to a tenant who constantly runs into trouble with the law or people he/she interacts with. Such tenants could include a tenant who gambles and clashes with thugs who will not hesitate to damage your property. Your tenant could even have a penchant for engaging in fisticuffs inside your property and damaging the property in the process.

In a situation where your tenant runs into trouble with the law while his/her rent is overdue, it leaves you at a disadvantage. Awful tenants also have a habit of stretching your unexpected expenses. When they damage things like the wiring, walls and plumbing system in your house, you find yourself with a tenant who denies being responsible to the damages to your property.

2. Over the course of time, there are different parts of your house that will call for financial commitment. Some might be quite expensive to take care of depending on the level of repair or servicing needed.

You cannot possibly be prepared for every possible repair that your rental property will need. There will always be those that will be unexpected e.g repairs due when a new tenant is moving in. You can work on minimising this by having previous tenants cover costs for any damages when moving out.

Checklist of Things to Look Out For and Those to Avoid

There are several ways you can cut down the disadvantages of buying rental property. Here are tips that will go a long way in helping you make the right decisions.

1. Are Your Expectations Realistic?

A rental property will create a steady cash flow for you but you have to keep your expectations realistic. You should not fantasize about buying a Lamborghini within your first year of buying a rental property.

You can’t wake up one day and decide to ask your tenant for two years worth of rent. The Tenancy law in Nigeria will not permit this.

2. Are You Familiar With the Law?

Would you rather spend a couple of weeks reading and understanding what the law says about rental property or would you rather tell the court that you did not really have time to read? Alternatively, you can hire a property lawyer.

3. Have You Checked Out the Location?

The location of your rental property plays a very pivotal role in how much you earn and the kind of offers you will get from prospective tenants. The property in highbrow neighbourhoods are pricey but they offer you a higher return on interest as opposed to property in other suburbs in Lagos.

4. Have You Arranged an Inspection?

If you want to cut down the possibility of unexpected expenses on your rental property, you should carry out a thorough inspection of the house. You can enlist the service of a professional real estate agent to do this on your behalf.

5. Does the Property Have Existing Tenants

You don’t want to acquire liabilities so you should know everything about the house and this includes knowing if there are tenants in the house with their rents still running.

6. Are Your Lease and Terms Legal?

As a rental property owner, it’s crucial to spell out the lease and your terms to prospective tenants in a way that is legitimate. A lease is a contract outlining the terms under which you agree to rent your property. It guarantees your tenant the use of the property and guarantees you regular payment over a specified period of time.

Don’t append your signature to lease documents over bottles of alcohol with friends and family.

7. Have You Run Background Checks?

Don’t take things for granted or at face value alone. Before you agree to lease your home to a tenant, consider running background checks. Does he/she actually reside in his/her current address? Does your prospective tenant have a steady source of income? It is better to have an empty property than having a tenant you would regret renting your property to.

8. Have You Made Friends With Professionals?

When you are ready to invest in rental property, make friends with a property consultant, a property lawyer and a tax professional. These three will provide you with all the knowledge and experience you need to become a successful rental property owner. You can also leverage your relationships with them in finding more opportunities in the real estate market.

9. Create an Emergency Fund Account

This is the account you set up to take care of all unexpected expenses that might crop up. There is a specific figure that is cast in stone but going for 20% of the value of the property would be a good idea.

The moment you begin earning income from your rental property, you can channel the money into an emergency fund account until you have hit your target.

10. .Are You Planning to Manage the Property Yourself?

You can decide to manage your rental property yourself or you can choose to hire a property manager to do this for you. To manage your rental property yourself, you will have to be on ground at all times to attend to the needs of your tenants.

If you decide to delegate this responsibility, you will need a trusted property manager to oversee the affairs of the property.

Regardless of whether you manage the house yourself or get someone to do it for you, it is crucial to visit the property from time to time to see things for yourself.

11. Is the Pricing Realistic?

No matter how amazing a rental property, make sure you are financially buoyant enough to cover things like tax payment, general repairs and maintenance. The cost of the house will play a huge role in this. Don’t depend entirely on the income that accrues to you from your rental property.

Options for Starters

Reach out to me for valuable advice and guidance on the prime rental property and neighbourhoods to invest your money in and how to optimise your steady flow of income.