Diversifying your investment portfolio is the key to a successful retirement. If 2020 showed us anything, it’s that life is unpredictable. The market can crash in the blink of an eye and wipe away your life savings. If you’re looking for ways to diversify that risk, consider learning how to make money renting houses. It’s not as hard as it sounds, and you don’t need nearly as much capital as most people think. With around a 20 – 30 percent down payment and a great financing program, you can buy investment properties to buy and hold. After you fix the home up, and/or get it ready for renters, find tenants and start your investment journey in real estate. But how do you make money renting houses? Here are a few ways.
You charge your tenants rent. The rent should cover the operating expenses including the mortgage payment, taxes, insurance, and maintenance/repair costs. Do your research before determining rent prices. Look at the area’s fair market rent and compare it to the annual operating expenses of owning the home (more on this below). Every month might not have the same cash flow depending on the costs you incur, such as unexpected repair expenses, but when done right, you can make a decent monthly cash flow from renting properties.
Paying The Mortgage Down
Whether you have tenants or not, you must pay the mortgage payment each month. Each payment lowers your principal balance and increases your home equity. While it’s not the same as cash flow, it increases your net worth because you owe a larger amount of the home’s equity. If renting doesn’t work out, you know you can at least sell the property and realize the capital gains earned from paying the mortgage balance down and home appreciation. There are many different types of loans for investment properties. If you choose the wrong type of loan, you may not receive the expected gain from the property. Therefore it is very crucial that you compare home loan options available before making a decision. Still not sure? Click here to compare home loan type and rates.
Depending on the home’s location, you may see an appreciation of 3 – 5 percent per year. This depends on the market, economy, and demand but these are good numbers to focus on. As the home appreciates, you naturally earn home equity. For example, if a home is worth $200,000 when you buy it, but five years later it’s worth $240,000, you earn $40,000 in equity before applying any money you paid toward the principal.
What You Need To Know About Renting Houses
It sounds easy to make money renting houses, and it can be, but you must know the ‘other’ expenses so you can prepare.
- Vacancy costs – Don’t assume the property will always be occupied. If nothing else, there’s a lag time between when one tenant moves out and another moves in. Landlords need time to fix any issues or make renovations/upgrades. On average, expect at least a one month vacancy per year.
- Management costs – You can pay a company to manage the property for you or manage it yourself. Either way, there are costs, whether financial or your time and resources. Figure the management costs into your overall prediction for a home’s income.
- Repair costs – Every home needs repairs, even new homes. On average, budget 1 percent of the home’s value or $2,000, whichever is greater per year.
- Delinquency – No one can predict if your tenants will pay the rent late. Implementing proper screening practices can decrease the risk of late rent payments, but nothing will eliminate it. On average, figure in 2 percent of annual rents for delinquency expenses.
Before you learn how to make money renting houses, decide how you want to manage it. Hiring a management company costs money, but frees up your time. The home provides true passive income this way. But, if you’re pinching pennies or don’t have room in the rent to cover management costs, determine how you’ll manage your time managing the property while not letting it take up too much time.
Anyone Can Make Money Renting Houses
Today, it’s easy to make money renting houses, especially since the rental market is larger than ever before. Do your homework, find the area that’s best suited for your budget and the profits you want to make, and find the right property. Start with one and see how it goes. You may find you love the passive income and being a landlord. It can be the start of a well-diversified and profitable portfolio that isn’t reliant on the market and its ups and downs. Remember you can easily calculate costs using a dedicated rental calculator on newsilver.com.
Frequently Asked Questions:
Is it possible to live off rental income?
The simple truth is that it can take many years to generate enough cash flow from a rental property to live off the income. This is primarily because the cost of the mortgage offsets the rental income you receive, meaning that you can only pocket the difference. What’s more, other expenses like rates and taxes, vacancy rate and maintenance costs will also eat into your bottom line. Getting back to the question at hand, it is possible to live off rental income, provided you own a number of rental properties that are all cash flow positive. Adding to this, if you do own a portfolio of rentals, you could potentially sell one or two to help clear bonds on your remaining properties. This approach can greatly increase the monthly cash flow of your portfolio, and open up the possibility of actually living off the rental income indefinitely.
Can you actually make money with real estate investing?
To put it bluntly, real estate wouldn’t be one considered one of the safest investments if it didn’t offer reliable ways to generate income, be it through property appreciation or monthly rent (or both). One such example is Mark Ferguson, the founder of InvestFourMore. As a real estate investor, Mark has managed to accumulate over $3.7 in equity with his portfolio of rental properties. He was able to achieve this level of wealth by focusing on:
- House flipping
- Accumulating cash flow positive rental properties
Perhaps more importantly, Mark’s story is not unique. There are literally thousands of investors in America that have setup lifelong income streams through property investing. If you dedicate yourself to this industry, you could potentially become a real estate millionaire.