How to invest in residential rental properties

Any issues across your residential rental properties can quickly impact revenue, with maintenance problems, tenant disputes, and unexpected vacancies all typical examples of areas where costs can spiral out of control and diminish the overall value of your investment.

To mitigate these risks, you need a comprehensive understanding of how to identify investment markers, choose the right property, stay on top of expenses, and please your tenants. 

In this complete guide, we explore:

• How to identify the best opportunities on the market
• The key factors to consider when assessing the potential value of an investment
• Different kinds of financing and insurance options
• Tenant-landlord regulations and local ordinances to consider
• Preparing properties for new tenants
• Proptech to protect your property from damage to safeguard your investment
• The 50% rule of operating expenses and maintenance costs

Identifying the best opportunities on the market

Finding the best investment opportunities relies on thorough market analysis and strong networking. 

Stay informed on market trends by reading industry reports, attending events, and monitoring economic indicators like employment rates and growth, as well as any wider development plans that will affect the property market.

Connecting with other investors is a fantastic way to gain valuable insights into the property investment space. Find local real estate investment groups and online forums to meet property investors, managers, and agents while uncovering leads.

Here are five tools you can use to support your research:

• Zillow: A popular real estate platform that provides property listings, market trends, and neighborhood data to help you analyze potential investments.

• CoStar: A commercial real estate information provider offering comprehensive data on properties, market analytics, and real-time trends, particularly useful for larger investments.

• Mashvisor: A real estate data analysis tool that helps investors find lucrative rental properties by offering insights on potential income, occupancy rates, and return on investment (ROI).

• BiggerPockets: An online community and educational resource where real estate investors share insights, strategies, and market data. It also features tools for deal analysis and property management.

• Redfin: A real estate brokerage that offers extensive data on property listings, including price history, market trends, and neighborhood insights, to help you make informed investment decisions.

Choosing the right property

Here, we explore a rundown of key factors to save you time when you’re looking for profitable units. 

Location

The location of the property will of course impact your target audience and, therefore, your potential revenue, how you market your units, and the kinds of amenities you should look to provide on-site. 

For example, if you manage multi-family residencies, locations with a strong job market, good schooling options, strong transport links, and low crime rates, will all be features you can draw on when attracting tenants.

Properties near business districts or other employment hubs are a good place to start because they offer a short commute. It’s also advisable to evaluate access to public amenities like parks, shopping centers, and healthcare facilities.

Future development plans

A rental property should be a long-term investment, so look to invest in areas with a growing population or locations that are in the process of being revitalized.

Assess upcoming infrastructure or developments like new public transport links, commerce areas, or schools. These can significantly boost the demand for your rental as well as increase the value of the property.

To do this, you should look into local government planning documents, zoning changes, and real estate market forecasts, which you can find through municipal websites, planning department offices, real estate research firms, and industry-specific publications.

Potential rental income

Calculate your expected rental income by looking at comparable properties in the area. You can use tools like Rentometer or Zillow’s rent estimate calculator to get a good picture. Make sure the expected rental income covers all of your costs, including mortgage payments, taxes, maintenance, and insurance.

One way to work out rental yield when mortgaging a buy-to-let property and understand the balance between risk and reward is to use the ROI formula.

This is yearly rental income minus yearly operating costs, divided by the total investment (including the mortgage value and any initial outlay like down payment and closing costs):

Formula: (yearly rental income - yearly operating costs) / total investment

Comparative market analysis (CMA)

Conduct a CMA to evaluate how similar properties in the area are performing in the market. This analysis will help you to get a clear picture of the rental rates and occupancy levels to expect.

You can perform a CMA yourself by:

1. Collecting data about the property you’re considering investing in. This should include its size, condition, location, and any unique features.
2. Identifying comparable properties that have been recently sold or put on the rental market. Find properties with similar features for a useful comparison.
3. Comparing the purchase price and rent costs of these properties to identify trends in the market. Consider price per square foot and time on the market too.
4. Accounting for any differences in size and features. Adjust your property prices based on things like upgrades, unique features, and the condition of the properties.
5. Using this adjusted data to determine a fair market value of your targeted property. Use this estimated rental income to reevaluate the list price.
6. Considering the market conditions in the area. It's important to take things like fluctuating supply and demand and seasonality to ensure a fair CMA.

Property condition

Determine if any repairs or upgrades are necessary, along with how much they’re likely to cost. This should be done during the due diligence stage of the investment process after you’ve made an offer but before finalizing the purchase. 

At this stage, conducting a thorough property inspection, either personally or with a professional, is crucial to identify any immediate issues or potential future problems.

Properties that are already in good condition with modern amenities will be more attractive to renters right away, but this should be balanced against their higher purchase value. Meanwhile, a fixer-upper can be a good investment, but, unless you have experience with renovations and a clear cost-management plan, it's important to be realistic about properties needing significant work.

If a property does require renovations, get quotes from contractors before committing to the investment, and make sure to factor these costs into your overall calculations.

Vacancy rates

High vacancy rates will have a significant impact on your rental income so you should look into the area's average vacancy rates and find properties in locations with a strong demand for rentals.

Investing in multi-unit properties like duplexes or triplexes is one way to help reduce the risk of vacancies as income from one unit can offset a vacancy from another.

As well as vacancy rates, you should consider tenant turnover costs more widely since readvertising, cleaning, and renovating after bad tenants can cost up to $2500.

You should focus particularly on turnover costs if you’re buying in locations with peak rental periods like college towns or vacation spots. These areas can have higher turnover rates even if vacancy rates are low.

Pro tip: You can reduce tenant churn and get proof of rule-breaking by installing Minut’s multi-monitoring device. You get proof of excessive noise and smoking and an automated notification when issues occur, plus it acts as a deterrent.

Understand your finance options and insurance

When buying a property, one of the most important decisions is whether you take out a buy-to-let mortgage or pay upfront. Here we look at your options in more detail. 

Mortgages

Buy-to-let mortgages are a common way to finance rental properties; you can expect to pay between 15% and 25% of the property’s value. Here are the two main options: 

• Fixed-rate mortgages provide a stable interest rate over the full term of the loan. This means the monthly payments are easily predictable and you can protect your cash flow.
• Adjustable-rate mortgages (ARMs) have interest rates that vary over time. For instance, they may start lower than a fixed rate but increase later on.

Compare different lenders to find the best interest rates and terms for your personal circumstances. It’s also important to consider the typical requirements to get a mortgage on a rental investment. This will usually be a minimum credit score of 620, savings to cover up to six months of mortgage payments, and enough cash for the down payment.

You’ll also need to hit the minimum Debt-to-income ratio (DTI) of each particular lender. The good news is that around 75% of your expected rental income can be counted towards this. 

Private loans

Private loans are offered by private lenders as opposed to banking institutions, making them an alternative option if you don’t quite qualify for a traditional mortgage. You’ll find they often have higher interest rates, but this is somewhat offset by usually having more flexible terms.

There are three main types of private loans available:

• Hard money loans are offered by private investors to companies and real estate investors. These are popular for ‘flips’ or quick investments, usually coming with higher rates and shorter repayment periods.
• Home equity loans are suitable if you already have substantial equity in a primary residence as you can leverage this to finance the rental investment. These normally have lower interest rates than dedicated investment property loans due to the level of risk.
• Home equity line of credit (HELOC) loans allow you to borrow money against the value of another property.

Insurance

Typical insurances you can expect to pay for your rental investment include:

• Landlord insurance for damages, liability, and loss of rental income
• Property damage coverage for fire, storms, and vandalism
• Liability protection which covers costs and damage if somebody is injured
• Umbrella insurance which includes additional coverage for lawsuits and major claims
• Flood and earthquake insurance as typical insurance may not cover this

You can lower your costs by bundling your landlord insurance with your existing homeowner policy. Not all providers offer this but it’s worth checking to see if yours does.

Research tenant-landlord regulations and local ordinances

In this section, we explore the key regulations you need to be aware of. 

Tenant rights

Before renting out the property, familiarize yourself with the local tenant rights laws. These govern issues such as security deposits and rent control. Understanding tenant rights will ensure your lease agreements are compliant and help to avoid legal disputes.

Common areas to be mindful of include:

• Security deposit regulations which govern maximum charges and return policies
• Rent control as some areas have laws limiting how much you can increase rent
• Eviction procedures, which guide how much notice you need to give tenants
• Legal grounds, which cover acceptable causes for eviction
• Lease agreements, which must reflect local regulations and include clauses for payment terms, maintenance responsibilities, and dispute procedures

Property standards

Local ordinances dictate standards for property maintenance. This includes safety, sanitation, and habitability requirements. It’s important to regularly inspect rental investments to avoid any tenant disputes and non-compliance penalties.

Common regulations include:

• Health and safety codes, which cover smoke and carbon monoxide detectors and fire exits
• Building codes, which cover structural integrity, plumbing, and electrical systems
• Habitability standards, which ensure adequate heating, water, and pest control

Pro-tip: Use Minut to monitor your indoor climate and avoid mold and damp. Minut continually assesses humidity and temperature levels to prevent issues from escalating and provide you with a mold-risk analysis.  

Prepare your units for new tenants

Ensuring your home is ready for new tenants involves making sure it’s attractive, functional, and compliant with all the relevant regulations. Beyond getting your property professionally cleaned, be sure to focus on these key tasks. 

Repairs and upgrades

A good rule of thumb is to set aside 1% of the property's value to cover any repairs. Start with basic issues such as leaky faucets, broken tiles, or faulty light fixtures.

After addressing any repairs, consider upgrading the property to enhance its appeal. This might mean fitting modern amenities like updated kitchens and bathrooms or energy-efficient appliances to attract eco-conscious tenants.

Tech upgrades

Tenants increasingly expect more digitally integrated living spaces. This could mean incorporating smart home technology such as keyless entry and voice-activated assistants or opting for high-quality alarm systems, for example.

Take into account operating expenses and maintenance

According to the commonly used 50% rule, operating expenses on a new rental investment will generally be around half of your total operating income. So to successfully invest in rental properties you need to keep these costs as low as possible:

• Property taxes
• Utilities
• Water, electricity, and gas
• Internet and cable
• General maintenance
• Seasonal maintenance
• Capital gains tax 
• Maintenance reserves

While some of these expenses are an unavoidable feature of property investment, others—like maintenance—depend on how well the property is managed. By implementing a privacy-first monitoring solution, you can give yourself peace of mind that you are proactively preventing issues. 

Minut is a property operations platform that monitors noise, occupancy, and cigarette smoke to ensure tenants aren’t harming your property. You’ll get an instant notification to your phone and the proof you need to take action and be compensated for any damage. Discover why 50,000 property managers around the world trust Minut to protect their property portfolios—book a demo.