Do you want to know how to start a rental property business?
You’re in the right place! Investing in rental property can help you do things like:
- Quit an unfulfilling corporate job
- Build a financially stable future
- Spend more time with your loved ones
I’ve done it, and I’ve helped dozens of others do it, too. Want to know the exact step-by-step process? Then, read on.
Biggest takeaways:
- Starting your own rental property business requires outlining your goals, creating a plan, and attracting the right tenants, among other steps
- Good location, amenities, and reasonable property prices are crucial when looking for your first property
- There are multiple ways to finance your first rental property, even without a deposit
What is a rental property business?
A rental property business is a business where you buy real estate in order to rent it out to tenants for profit. There are multiple types of rental properties you can invest in, such as:
- Commercial
- Residential
- Multi-family
- Single-family
- And student housing
I built my seven-figure business by renting to students. In this video, I share more about my story:
Rental properties can be a good business because you get a sustainable source of passive income, and you hedge against rising interest rates.
With that in mind, let’s look at what you need to do to build a successful rental property business.
How to start a rental property business?
To start a rental property business, you need to:
- Outline business goals
- Conduct market research
- Create a business plan
- Secure financing
- Select your properties
- Advertise your properties
- Attract tenants
- Manage your properties
- And get the right licenses, permits, and insurance
Let’s look at each step in detail.
1. Outline business goals
Ask yourself this question: Why do you want to run a rental property business?
Your “WHY” will help you define your goals and decide what real estate strategy is best for achieving them.
For example, mine was financial freedom and fulfillment.
Yours could be:
- Building long-term wealth
- Creating passive income
- Retiring early
- And leaving your corporate job
You could also pick just one. Whatever you choose, I recommend writing it down and then researching which rental property investment strategy will work best for you.
Next, let’s look at market research.
2. Conduct market research
Within rental property investing, there are different niches you can choose to align with your goals:
- Residential: best for long-term property appreciation
- Commercial: potentially high returns but also more paperwork and vacancy volatility
- Single-family: ideal for long-term passive income
- Multi-family: great if you want to become a high-earning entrepreneur, but it has higher upfront costs
- Student housing: good for financial stability and low vacancy rates
Once you’ve decided which niche works for you, it’s time to research to find the right property.
For example, if you want to rent to students, you need to find a neighborhood in a college town with good access to the local schools.
Then, dive deeper into the real estate market in the location. Look at the average rental rates, property values, and vacancy rates to make the best decision.
Here are some questions to ask before purchasing a property:
- How much could you charge for rent?
- What would the maintenance costs be?
- What are the property taxes in the area?
- What is the cash-on-cash return (your earnings divided by your investment)?
Luckily, you can find out a lot of the answers to these questions from real estate agents and trustworthy online resources like Realtor and Zillow.
Now, let’s cover what to do for your business plan.
3. Create a business plan
Many new real estate investors skip creating a business plan, but this step doesn’t need to be complicated, and it’s important for you to make one.
Essentially, you need to define three main things:
- Finances
- Marketing strategy
- And a risk management plan
Starting with financial projections, the most important metric is your ROI (Return on Investment) and cash flow. Without a profit, you won’t be able to achieve the financial freedom you want.
To calculate your potential cash flow on a property, you need to figure out the potential rental income you can expect to bring in minus the average expenses.
Expenses on a rental property include:
- Maintenance/repairs
- Insurance
- Property taxes
- Leasing fees
- Vacancies
- CapEx (capital expense) funding
- Advertising
- Property management-related travel
The average cash flow on a rental property is about 8%, but if you’re smart with your financial projections, you can achieve a higher rate.
Next, your business plan should have a marketing strategy for your property. In a later section, I’ll talk about exactly how to advertise to attract good tenants.
Finally, write down your risk management measures.
For example:
- Tenant screening standards
- Terms and conditions for lease agreements
- Property inspection schedule
- Landlord insurance policy
- Emergency plan and property management fund
Clearly defining all of these elements will make managing your rental property much easier. You can also present this plan to your bank or private lender to help you secure a mortgage.
4. Secure financing
Financing your first rental property can be very nerve-wracking for many new real estate investors.
But don’t worry! There are various options available to you.
Here are six:
- Conventional bank loans: This is the most common method of financing a rental property. You’ll need at least 15-20% of the property value for a down payment, plus a healthy credit score and stable income.
- Federal Housing Administration (FHA) loans: FHA loans are government-backed mortgages for low-income first-time buyers. Down payments are much lower at around 3.5%, but there is a stricter home appraisal process.
- Home equity loans: If you already own a home, you can tap into your home equity to take out a second mortgage.
- Veterans Affairs (VA) loans: VA loans are reserved for veterans or active-duty service members with a good credit score. You don’t need a down payment, but you do need to pay a 1.5-3% funding fee.
- Private lenders: If you have friends, family members, or colleagues who could lend you the amount for a down payment, this could be a viable financing option to get you started. Crowdfunding is another popular form of private lending.
- Hard money loans: Hard money loans are mortgages that use property as collateral. They have much higher interest rates than conventional loans but are more accessible to those with bad credit.
If you want more of a deep dive on financing a rental property, check out this article.
Next, let’s go over selecting your properties.
5. Select your properties
Now, it’s time to find your first property.
Here are some factors to consider:
- Property type: The type of property you invest in depends on who you intend to rent to. For example, as a student housing real estate investor, I purchase properties with multiple bedrooms I can rent out per room.
- Location: Choose a location that would work best for your ideal tenant in terms of local amenities, transportation links, and average rental rates.
- Condition: If you need to invest a lot in fixing your first rental property, it will impact your cash flow and delay getting your business started.
- Potential for appreciation: A rental property in good condition in an ideal neighborhood will appreciate over time.
- Price: You want a mortgage payment that is lower than the average rent in the area.
For more, watch this video to learn how I choose my investment properties:
6. Advertise your rental properties
To advertise your rental property, ask yourself this question: Who do I want to rent to?
For example, because I focus on student housing, I advertise my properties on campus housing Facebook groups.
If you want to attract seniors who will live in the property for a long time, putting an ad in the local paper is an effective strategy.
Here are some more marketing strategies you could try:
- List your property on sites like Zillow
- Stick a “for rent” sign outside of the property
- Host an open house
- Post on Facebook Marketplace or Craigslist
- Partner with realtors
Here’s another tip: focus on one or two strategies to begin with. And keep in mind that in areas with high rental demand, you’ll receive a lot of interest with minimal effort.
7. Attract tenants
Choosing great tenants is key to having a positive cash flow. You want reliable renters who pay on time and upkeep your property as if it were their own.
So, how do you find them?
I teach my students the PRIME method. It goes like this:
- Placement: Putting your ads in the right spaces (see my previous point).
- Review: Research your tenant’s background to ensure they are someone you want to rent to.
- Identify: Figure out the type of person they are through how they communicate with you in the early stages. For example, are they polite and reasonable or the opposite?
- Measure: Measuring responsiveness will show you if the tenant will be easy to rent to. Someone efficient with their paperwork and ongoing communication is more likely to be a dream renter.
- Ensure: Ensure their proof of income by requesting appropriate documentation. This includes payslips, work contracts, or profit and loss (P&L) statements for self-employed individuals.
By using this process, you can filter through the best candidates for your rental property.
Once you’ve found great tenants, create a leasing agreement with clear and reasonable terms.
8. Manage your properties
As a landlord, your main responsibilities are to manage your:
- Tenants
- Finances
- And property
The last part can sound like a lot of work, but you can simplify it with a solid strategy.
It starts with a good system for collecting rent. You can use a platform like TenantCloud to simplify this process or go old school with a good spreadsheet.
I recommend defining how you’ll communicate with your tenants, too. For example, do you prefer email, phone calls, or text messages for emergencies?
Next is to tackle maintenance and repair. This is a normal part of being a landlord that you can also streamline.
You can decide how hands-on you want to be with it, too. Some landlords fix and repair their properties by themselves. Others prefer to hire a property management company to take care of everything.
My philosophy is to empower my tenants to handle emergencies that come up, and I reimburse them. Collecting a deposit when your tenants move in also helps cover any damages caused by them.
In addition, scheduling regular inspections with your tenants ensures they are taking care of the property, and you can catch any issues early.
Learn more about this topic from my guide on managing your rental property here.
9. Get the right licenses, permits and insurance
Finally, let’s talk about licences, permits, and insurance.
These will all depend on where you are as each state has very different regulations around rental properties.
I recommend using local government websites and consulting an attorney to ensure you are compliant with all of the regulations.
As for insurance, shop around for the best deals for your situation. You can also request recommendations from your network.
So, now that you know the steps to succeed as a rental property owner, what should you look for in your first purchase?
Features of a successful rental property
A successful rental property that attracts tenants and increases property value has…
- A great location: Your property’s neighborhood will determine the tenants you attract, your rental income, and vacancy rates.
- Good condition: Ideally, you want a property needing minimal repairs, so you can list it straight away.
- Reasonable property taxes: Property taxes vary widely across the country. They should be low enough for your business to be profitable.
- Solid local amenities: A dynamic location with grocery stores, gyms, parks, and public transport links are more valuable to tenants.
- Good average rents: Your rental income needs to cover your mortgage payment, taxes, and expenses. Therefore, the average rent-to-mortgage ratio in the area is crucial.
- A strong local job market: A strong job market attracts more high-quality tenants to the area.
- Low crime rates: A safe location is appealing to everyone, but especially high-income families.
- Great local schools or colleges: Whether your ideal tenant is a single family or student, access to top schools and colleges increases your property value.
With those features in mind, let’s look at the pros and cons of running your own rental property business.
Benefits and challenges of running a property rental business
As with anything, there are positives and negatives to running a rental property business. Here are a few to consider.
Benefits:
- Great tax benefits
- Better deal than buying property to live in
- Simple to get started
- Reliable passive income
- Multiple budget-friendly financing options
Challenges:
- Market fluctuations can affect your property value
- High maintenance costs can impact your cash flow
- Some locations are prone to long vacancy periods
- Tenants can be demanding and difficult
But you can mitigate these challenges if you avoid the big mistakes first-time rental property owners make. Watch this video to learn more about them:
FAQs: Start a rental property business
How profitable is a rental property business?
A rental property business can be highly profitable spending on your strategy. For example, I have a cash flow of $3,660 on one of my student housing properties because I purchased the home at a good price and rent out the rooms at a profitable rate.
What type of business is best for rental properties?
The best type of business for rental properties is a limited liability company (LLC). This structure lowers your personal liability risk.
Can you start a rental property business with no experience?
Yes, you can start a rental property business with no experience, but there’s a lot to learn, so I recommend finding reputable sources to educate yourself on how to run a rental property. For example, you can take a real estate investment program or hire a real estate coach like me to guide you. You could also partner with an experienced rental property business owner to learn what you need to know before starting your own.
Next steps
And that’s it! Now, you know how to start a rental property business.
As you can see, it’s a long-term path to financial freedom and fulfillment, not a get-rich-quick scheme.
Plus, there are some key mistakes to avoid if you want to be successful.
I know because I’ve been there myself. I made plenty of expensive mistakes as a newbie investor. Now, I help other first-time rental property owners build sustainable, profitable businesses so they can live the life they want.
Want to learn more?
Find out about working with me here.
