First Things First:
This guide is meant to be a starting place for anyone who is interested in “buy and hold” residential real estate investing; in other words, purchasing a home and renting it to someone else.
There are many other ways to invest in real estate (commercial, industrial, retail, REITS, etc.), but this article would quickly transform into a very thick book if we attempted to get into the details of all of them. For now, we are going to keep it simple: buying a home with the purpose of renting.
(If you are looking to get into any of the other channels of real estate investing, stop here and contact us.)
Why buy a home and rent it to someone else?
If you have been a renter at any point in your life, as most of us have, you have probably experienced firsthand that rent is always on the rise. Nearly every time a lease is renewed, the rent rate increases at least a little bit. On the other hand, if you have owned a home or researched home-ownership, you know that a mortgage has a fixed monthly payment that doesn’t change at all, even if it takes 15-30 years to pay the loan off.
Considering that in most markets, the average monthly rent is higher than the average monthly mortgage payment, a homeowner can easily make a profit off of renting that home; even if they are still paying off their mortgage. Heck, someone could even buy a home, rent it out, and have the renter effectively paying their mortgage the entire time until iit is fully paid off. Everything they earn after that point is extra income.
If renting out one home can be an excellent source of passive income, imagine renting out several homes. This could potentially subsidize or replace full-time employment, which is what makes real estate investing is so appealing to many people.
So let’s get into it: how do you start investing in real estate?
Before you quit your day job to pursue real estate investing, realize that although it can be highly profitable, this is not a get-rich-quick scheme. You are going to need to put in serious effort if you want to get serious results. Just like the life event of buying your own home, buying an investment property could turn out to be quite the climb; but we Sherpas will be there to guide you every step of the way.
First, form a legal entity to protect yourself.
It is extremely rare that a successful real estate investor purchases property in their own name. Forming an entity is important, because it limits the financial risk you take on as an individual. Lucky for Utah investors, forming a legal entity such as an LLC in our state is easy. There is even a One-Stop Online Business Registration website to help you set up your entity quickly.
Then, research potential locations for your investment property.
“Location, location, location!” Why do you think that phrase has been embedded into our culture’s common vocabulary? Because location MATTERS. You could purchase a brand-spanking-new or fantastically renovated home… but if it’s an hour away from the city, where most people’s jobs are, or it happens to be right next to the city dump, you are not going to get as much out of it as a more dated home in a trendy neighborhood with great access to public transportation. In-depth research needs to be done in order to find the right location for your investment.
Be sure to evaluate the health of the market in your ideal location.
Look into economic indicators (i.e. cost of living, income growth, and unemployment rate) and population data. If there is a trend of people moving away from the area, you probably don’t want to invest there. But if people are moving in, and there’s job growth (like in the Silicon Slopes and many other Utah communities right now), that is a good sign.
Next, you will need to build your team.
Unless you have enough cash to outright purchase the home, you are going to need a mortgage. With so many different types of loan programs out there, it is best to work with an experienced Loan Officer; someone who has worked with investors in the past and can give you guidance on the best loan for your situation. If you need a recommendation, reach out to us; we work with several of the most dedicated Loan Officers in our industry.
You will also need a Realtor; one who has experience working with investors and expert knowledge of the community you are investing in. Hiring the right Realtor can save you hours of research time because they live and breathe the market stats you need to understand to be a successful investor. Your Realtor will give you guidance and be a true mentor to you as you begin investing. We Sherpas have worked with several investors and are happy to share what we have learned with you! Contact us for a free consultation today.
Finally, think about how your property will function on a day-to-day basis.
For the sake of your time and sanity, you will want to consider hiring a property management company. Kristin Matulonis, Managing Broker of Equity Property Management, told us the major benefit of doing this is reducing overall liability. She said that because it is “very much a contractual business,” property management is “a high risk for liability for an Owner if they make the wrong move. Management companies can mitigate this risk for Owners.”
For a small fee (about 7-10% of your gross rental income), you won’t have to worry about finding tenants to rent your property, screening their application, handling the rental contracts, taking care of maintenance requests, etc. If your goal with real estate investing is to gain more freedom by subsidizing or replacing employment income, outsourcing property management is a must.
Remember, if it were easy, it wouldn’t be worth it.
When it comes to real estate investing, you get out what you put in. There may be a mountain of hard work and hurdles to overcome, but if you surround yourself with a team of professionals who know the industry and have your back, you will reach the peak. Don’t hesitate to contact us with any questions you may have. We’ve done this climb before!