Managing rental properties is one of the most popular strategies for generating passive income in the United States. In theory, it’s very simple. Once you purchase a rental property, you can secure a tenant, collect income from them, and use that income to cover your expenses. In most cases, you’ll generate a small profit every month while benefiting from property appreciation.
So, why aren’t more people managing rental properties actively?
One answer is because you need several things before you can get started – and not all of them are easy to acquire. What exactly do you need to start managing a rental property?
What You Need to Start Managing a Rental Property
These are some of the most important things you’ll need to have before you can start managing a rental property:
- A high-level plan. Before you start shopping around for properties, you need a high-level plan in place. Why do you want to rent properties? Is this the best financial strategy for your current position? Are you going to create an LLC or manage properties as an independent individual? What is your business strategy for marketing your properties and making money? Are you going to start with just one property, and if so, are you going to expand in the future? You don’t need to have every detail nailed down, but you should have an understanding of what you’re trying to achieve and how you’re going to achieve it.
- Sufficient capital. You also need sufficient capital before you can start investing in properties. Real estate is somewhat expensive; even in some of the cheapest areas, you’ll probably need six figures of capital to purchase properties outright. Even if you’re taking out a loan, you’ll still need enough money to make a down payment – and lenders typically demand at least 5 percent of the purchase price. If you don’t yet have much money, you’ll need to start saving.
- A property manager (optional). It’s ideal to have a property manager for your rental property. Your property manager is going to take care of almost everything associated with the property, from repairs and maintenance to evicting tenants when necessary. In exchange, they’ll take a small percentage of your gross revenue each month as a fee. This will cut into your profits, but it will also save you a lot of time and headaches, especially as a new property manager. If you don’t want to hire a property management company, you should at least build a network of contractors who can help you with issues when they come up.
- Contingencies. What happens when something goes wrong with the property? What happens if you start losing money on the property every month? What would you do if you went several months with a standing vacancy? It’s important to think about worst case scenarios and plan some contingencies. Like with your high-level plan, you don’t need to comprehensively cover every detail, but you do need to think ahead.
- An ideal property. The last thing you need to start managing rental property is the ideal property for your strategy. Look for properties within your budget in a neighborhood with strong growth potential. Newer properties tend to require less maintenance, but older properties are less expensive, so keep this in mind during your search.
Gaining Knowledge and Experience
It’s also important to recognize that your rental property management strategy is going to become much more effective once you have enough knowledge and experience. You’ll be able to find more attractive, profitable properties, deal with issues more efficiently, and ultimately generate more revenue with fewer expenses.
These are some of the best strategies for acquiring that knowledge and experience early in your career:
- Read articles and books. There are tons of amazing books on how to invest in real estate, and even more articles on the subject online. Dive in and absorb everything you can.
- Shadow real estate mentors. You can get even more knowledge by shadowing a real estate mentor. Are there real estate investors in your city who are willing to take you around and show you the ropes?
- Build a network of competent experts. Start finding reliable contractors with different areas of expertise – and learn from them.
- Start small. Finally, be willing to start small. Even if you want to eventually have a large portfolio of properties across many cities, as an amateur, you’re better off starting with one or two easily manageable acquisitions.
Managing rental properties isn’t the right financial strategy for everyone, but everyone has the potential to acquire the basics necessary to make the strategy work. As long as you’re willing to continue improving your knowledge and abilities, you can keep making your strategy more effective.