Learning how to start a rental property business will require a lot of work, but the passive rewards are well worth the initial effort.
Investors interested in passive income properties should first start with a rental property business plan.
Starting a rental property business has become synonymous with today’s greatest retirement strategies.
As Antoine de Saint-Exupery once said, “A goal without a plan is just a wish.” Consequently, the best plans have developed a reputation for helping people in every industry realize their own goals, no matter how lofty they may be. There literally isn’t a single professional who couldn’t benefit more from a well-crafted strategy, and real estate investors are no exception. Buy-and-hold investors, in particular, stand to better their long-term outlook when they take a moment to establish a sound rental property business plan.
A proven rental property business plan can help lay out the systems and benchmarks investors need to realize success at a higher level. That said, only one question remains: what does a rental property business plan look like?
If you are interested in starting a rental property business, there are several valuable lessons to take away from experience. Meanwhile, here’s a guide for developing a bullet-proof rental property business plan; it may be just what you have been waiting for.
What Is A Rental Property Business?
A rental property business is a venture through which an investor will purchase and manage one or more income-producing properties. These properties can have one or more units that are leased out to tenants in exchange for monthly rental fees. Investors can have an effective rental plan without having to directly manage these properties; property management companies can be hired to carry out the duties often associated with landlords, such as rent collection and maintenance.
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Is My Rental Property A Business?
Renting a house may be considered a business endeavor, depending on who you ask. This may seem like a controversial question, and there are at least two answers to take into consideration. From a financial standpoint, renting a residential property may result in passive income. It is important to note that investors do not have to pay self-employment taxes when reporting their rental properties. Therefore, many would argue that owning a rental property is not considered a “business,” specifically in the lens of tax filing. From a career standpoint, however, many individuals make a living on passive income derived from their rental property companies; in this lens, renting a house can be considered a business. When all is said and done, it’s entirely possible to manage a rental property portfolio as a business, but those with a single rental property may not necessarily need to start a company to collect passive income. It’s only once the portfolio starts to grow that turning the practice of renting into a business becomes more important.
How To Start A Rental Property Business
Learning how to start a rental property business isn’t all that different from just about every other entrepreneurial endeavor. Investors simply need to identify several key elements prior to getting started; that way, they can start their business on a solid foundation. Here are some of the most important steps to consider when drafting a rental property business plan and becoming a real estate entrepreneur:
Join a local REI club and start networking
Pick a niche and choose your rental property market
Figure out the proper financing and secure it
Conduct the appropriate research and hire a manager
Implement systems to improve efficiency
Manage the properties and scale the business at a sustainable pace
Join A Real Estate Investor Club
Joining a local real estate investing club or association provides networking opportunities, not the least of which may actually help rental property investors find a partner—or perhaps anyone else who may help them further their rental property business plan. There’s absolutely no reason to think new investors, and specifically aspiring rental property owners, can’t find a helpful hand at a real estate investor club. These types of meet-ups are specifically designed to help their attendees, and there’s always someone willing to lend a hand. At the very least, investors will gain insight into local professionals who are most likely already doing the one thing they want to do.
Pick A Niche & Choose A Market
Determining where to invest can often be more important to investors than how much capital, or experience they bring to the table. After all, the golden rule of real estate still persists: location, location, location. There is perhaps no factor that is more influential to the success of a rental property investor than the location in which they choose to invest. The location will determine everything from demand and price, not to mention the property’s long-term potential. Therefore, a truly great rental property business plan will want to make sure it answers these questions, and many more just like them:
How distant a market am I willing to invest in?
Do I have a team in place to handle the day-to-day, or will I have to commute back-and-forth?
How much will commuting and market research cost me?
How stable and diverse is the economy in a market? Are there various business sectors that can help keep jobs and businesses? Is there one main employer?
What’s the average market price for property acquisition?
What’s the average rental price?
There’s no rule that says investors need to live in the markets they invest in, but there is no excuse for neglecting to mind due diligence and research the local hosing market. To invest successfully, investors need to know every detail about a specific area, not to mention the specific niche they intend to serve. If for nothing else, investors need to know their renters just as much as the area they are investing in. Picking a niche, not unlike focusing on college housing or single-family homes, is the easiest way to target a specific audience. Therefore, it’s at this time rental property investors should decide who they are going to serve; only then will they be able to tailor their rental property business plan to see the needs of their audience.
Figure Out Financing
Securing financing is probably the biggest hurdle rental property investors face. However, financing a real estate deal isn’t nearly as hard as many new investors make it out to be. As it turns out, there are countless lenders just waiting for an opportunity to give a savvy investor the money they need to invest in real estate. Outside of traditional sources, like institutionalized banks, today’s real estate investors have access to more funding sources than ever before. Private money lenders and hard money lenders, in particular, have become synonymous with the best ways to secure funding, and are as willing to work with investors as investors are eager to work with lenders.
These “alternative” sources tend to coincide with higher interest payments (often three to four times higher than traditional banks), but the added cost is well worth it. In exchange for their higher rates, investors not only receive the money they need to complete a deal, but they also receive it a lot faster than they would if they went through a bank. Whereas banks can take upwards fo a few months to distribute funds, alternative lenders can have the money in investors’ hands in as little as a few days—if not hours.
It is also important to note that securing financing should be done prior to even looking for a home. That way, the investor will know exactly how much home they can afford, and which investments are worth pursuing further.
Conduct Research & Hire A Property Manager
Becoming a landlord means investors will be responsible for maintaining the appearance and function of the rental property. Whether or not the investor is a handyman, however, is a moot point, as it’s highly recommended that they hire a property manager. While it helps to know everything about a subject property, enlisting the services of a third-party property manager is an essential step in a rental property business plan. Through their help, investors may expand their portfolio without adding on countless hours of work. If for nothing else, a property manager will take care of everything. From finding tenants to collecting rent, property managers will see to it that everything is covered. Meanwhile, the investor is free to add more assets to their portfolio and increase their passive income cash flow.
There are many rental plan options for landlords, such as specializing in low-income neighborhoods or university towns. Alternatively, they can choose to specialize in higher-income, urban neighborhoods. Different strategies require different skills sets, so landlords may find better success if they pick a niche in which they specialize. However, regardless of the niche, landlords will need to set up a system for running applications, credit and background checks. Adding proven systems to a rental property business plan is the surest way to make success habitual. Therefore, investors will need to create a system for every single process associated with rental property investing. That way, there will always be an appropriate course of action, regardless of the situation. Property managers, for that matter, make it a lot easier to implement systems.
Manage The Properties
Managing a rental property is about far more than just hiring a property manager; it’s about figuring out exactly what systems will be put in place to keep the properties in good shape and the cash flowing in. This means answering queries like:
Are you going to be a landlord? (Or will you hire a property manager?)
Who will find and select tenants?
Will you perform repairs to maintain property? (Or hire a contractor?)
Who will perform yard maintenance and other duties?
Your answers will depend on your budget, and available time. The key is to use your rental property business plan to map out all management systems beforehand and ensure there are no last-minute surprises.
How To Write A Rental Property Business Plan
Starting a rental property business is one thing, but learning how to write a rental property business plan is something entirely different. While the two sound similar, the latter is a critical step that makes the former even stronger. At the very least, knowing how to start a rental property business must come before actually starting one. As a result, investors will need to familiarize themselves with the most important steps first:
Determine a vision and write a mission statement
Set passive income and business goals
Build a team structure that is conducive to success
Gain a high-level overview perspective of the company as a whole
Develop marketing systems and funnels tailored to a specific audience
Vision & Mission
A truly great rental property business plan must emphasize one thing above everything else: the investor’s vision or mission. What an investor hopes to achieve by investing in real estate may simultaneously serve as motivation and a guide when times are less than ideal. Therefore, investors must take a minute to think about why they are investing. Is it to retire comfortably? Is it to spend more time with family and friends? Is it both of these things? Knowing their “why” will help investors build out a sound business strategy; one that gets them closer to their goals with each and every investment. Consequently, those without a mission won’t have any idea what direction to head, which doesn’t bode well for any rental property business.
Passive Income Goals
While closely related to one’s own vision or mission, passive income goals identify how much cash flow will be necessary to satiate investors’ appetites. That said, passive income goals should help investors meet their own mission statement. Likewise, if an investor wants to retire comfortably, they will need to set their passive income goals high enough to facilitate their desired retirement. While everyone’s passive income goals will be different, a general rule of thumb is to account for how much cash flow will be necessary to maintain their preferred lifestyle.
Remember, goals should be realistic and directly related to the reason someone wants to invest. Seeing overly ambitious goals can deter many investors from progressing, so it’s important that the goals are achievable. The sense of accomplishment developed from realizing a goals is, oftentimes, a powerful motivator.
Determining passive income goals will also help answer the most important question of them all: what type of rental property will I focus on? Residential? Commercial? Multi-family? Start from the end, and work backwards for better results; it’s the best, and most efficient, way to build a business.
Starting a rental property business may lead many investors to hiring a team. After all, it’s true what they say: many hands make light work. The more qualified individuals investors have working towards a common goal, the more likely they are to realize success. Not only that, but hiring a competent real estate team is simply one more step towards investors removing themselves from the equation and earning more passive income. That said, it’s not enough to hire just anyone; the employees need to bring something new to the table. Investors need to hire a team that compliments their skills—not that replicates them. That way, the team structure is more well-rounded and capable of accomplishing more tasks.
Investors need to look beyond the prospects of a single investment property, and towards the potential of an entire portfolio. While a single home can produce encouraging cash flow levels, an entire portfolio can help investors realize financial freedom. Therefore, it’s important not to forget the “bigger picture.” Sure, start with a single home, but plans should inherently be scalable. When writing a rental property business plan, see to it that everything can be expanded to include future growth.
Buying a rental property is just the first step on a passive income investing journey. At some point, investors need to figure out how to find tenants to bring in cash flow. More often than not, investors will rely on their property manager to fill vacancies. However, in the event an investor neglects to hire a property manager, there are various ways to find tenants, not the least of which include:
Local bulletin boards
Direct mail campaigns
Is A Rental Property Business A Good Investment?
Investors will know if a rental property is a good investment if their net cash flow remains consistently positive. Seasoned real estate investors know that, in order to have a solid rental plan and business, they must first mind their due diligence and ensure that a rental property is indeed a good investment. There are several measurements available to help investors get an idea of the profit-making potential for a property. Make use of 10 real estate calculators that are helpful for any type of real estate investor.
Confidence isn’t simply a positive mood based on affirmations and “feel-good” mantras. Confidence, according to Webster’s Dictionary, is the “state of feeling certain about something.” Meanwhile, there may be no greater confidence-booster than a rental property business plan that comes to fruition. By mapping out your precise goals—and the systems you’ll employ to achieve them—you’ll find wealth-building objectives more attainable than you ever thought possible.
Do you have experience setting up a rental property business plan? Share in the comments below: