2. Determine what you want to invest in
While single-family rental properties are one avenue of investing, they're not the only option. You could own a duplex, triplex, quadplex, or something even larger (if you're interested in commercial rentals). Decide if you'd like to own vacation rentals or long-term rental properties, too.
No matter what property type you choose, it’s essential to know what qualities of that property type are in demand. This includes the size of the unit or home, the number of bedrooms and bathrooms, or possible amenities such as a pool or fireplace.
Find out if there's an oversaturation or undersupply of a specific property type. You might find, for example, that an area has too many one-bedrooms and few two-bedrooms available for rent. You can do this by looking at the current inventory on the market on real estate rental industry sites such as Zillow, HotPads, or ForRent.com. Talking to a local real estate agent is another great way to get information on a specific market.
Make sure you know what you're looking for in a rental property, including:
- square footage,
- number of bedrooms or bathrooms,
- type of build (e.g., wood or concrete),
- type of parking available, and
- property type (e.g., single-family residence, condo, townhome, duplex, triplex, or fourplex).
It’s not uncommon to have different sets of criteria for different neighborhoods.
3. Find potential rental properties to invest in
Once you’ve narrowed down your market and know your criteria, you can search for properties to invest in. There are several ways to find investment properties.
Search in the MLS or work with a Realtor
The most common way to identify potential investment properties is by searching the multiple listing service (MLS). Websites like Realtor.com and Zillow let you set up search parameters and alert you when a new listing matches those criteria.
You can also reach out to a real estate investment agent in the area and ask them to set up those same alerts. A quality realtor can be an excellent source for connections to banks, lending institutions, contractors, or suppliers that will come in handy when buying a rental property.
They may also be able to bring you pocket-listings, which are listings that haven't gone live on the MLS yet.
Buy a turnkey rental property
Certain companies specialize in selling turnkey rental properties. These rentals require little to no work after buying -- this is a passive investment mostly for cash flow. (Of course, no rental is completely passive; you may have to get involved if things take an unexpected turn.)
In most circumstances, the properties have been renovated, have an existing tenant in place, and have a third-party management company handling the landlord responsibilities.
However, just because it’s a turnkey investment doesn’t mean it’s a worthwhile one. Research the market to determine if the purchase price, rental rate, and location of the property support the investment.
Work with a wholesaler
A real estate wholesaler finds off-market investment opportunities at below-market prices. They negotiate a low purchase price with the seller and assign the contract to a third-party buyer at a higher price. The wholesaler makes a profit from the difference between the purchase price and the sales price.
Typically, wholesale properties require a 100% cash payment to close. They often need renovations or improvements, too, so they might not qualify for financing. There are alternative lenders, like hard money and private lenders, that can help with cash for closing and funds for repairing the property. These lenders, however, can charge high interest rates and only loan money for a short period of time.
While wholesalers can have quality off-market investment opportunities, financing difficulties can make it hard to work with them.
Another way to find a potential rental property to invest in is by conducting a marketing campaign. You might use targeted online marketing or put out bandit signs. Direct mail marketing is another popular option.
In a direct mail campaign, an investor sends a series of letters or postcards to off-market sellers. Companies like List Source and Data Tree let you create and buy lists of people that meet certain criteria. You might look for owners in foreclosure or pre-foreclosure, properties that recently went through probate, or properties owned free and clear (without a mortgage).
You can narrow the list down by property features, such as the number of bedrooms and bathrooms, or by county, ZIP code, or city.
You can run your own mail campaign by typing or handwriting a series of letters or postcards. You can also hire a third-party company to do it for you.
This method of finding potential investments involves the most effort and cost. It can be a great source for finding off-market rental properties, but it may not be the right option for you. If you're willing to put in the time, effort, and funds required to run a successful mail campaign, this is a quality source of off-market inventory.