When it comes to running a business, most people think of being a high-level CEO or sitting on the board of some multi-million dollar operation. The second thought process is usually being part of an MLM tier. A Primerica or Mary Kay sales rep comes to mind. However, most people do not think of owning rental properties as a viable business opportunity.

Think about this though: who received the money every time you put in a rental check on your first place? The landlord.

While landlords have to pay for licenses and other building maintenance fees, a part of that rental check goes to their pocket. Why? Owning and renting property is a viable business. Most people just don’t think of it.

House flipping and wholesaling properties is part of the real estate world as well. However, turning a home into a rental property often turns out to be the most lucrative form of real estate investment for several reasons.

1. Leverage

When purchasing a rental property, there are several advantages to owning the land yourself. The first of these is the leveraging of assets. By being able to borrow money from a lender—whether from a bank, business partner, family member, or another entity—you allow yourself to make an investment at a fraction of the cost. Wholesaling requires you to buy the property outright before you can set it back on the market.

However, having a mortgage allows you to make monthly payments to the lender—payments that can easily be covered and exceeded by the presence of 3-4 tenants in a single house.

Each tenant’s rental payments can be between $1000 and $2000 a month—depending on location, roommate deals, and property value—which means that you will not only cover utilities, repairs, and your own mortgage costs, but you will come out ahead every month.

This leveraging also gives you the opportunity to live on your rental property yourself. While you will make a bit less by keeping a room for yourself on the property, you will still essentially be living in your home for free—and at a profit. There are truly no downsides there.

2. Creativity

Like any business venture, you need to have a bit of spice to keep things innovative and interesting. In house flipping, you usually do not make any kinds of improvements to the property. It’s not that you can’t, you just don’t for the sake of time. However, if you decide to purchase a fixer-upper outright, you can put nails in the walls wherever you want whenever you want.

This means that while the property is under your name, you can make as many innovations as you please to increase its value. Put in a swing set, a porch, a fourth bedroom, automate the entire kitchen… literally whatever you want that you can afford.

Another creative idea you could put into place is enlisting your renters to upgrade your property as part of their contract. You could offer them reduced rental rates if they want to finance some home improvements for the duration of their stay. Or, if you are housing a group of college kids, you can enlist their youth and have them work on the house themselves for lower rental rates. While you will not be making as large of a profit this way, the return in a few years will be much greater once you turn over to new tenants.

3. Identify Your Choice

In businesses, it’s important to shop around and make sure you are getting the best products to optimize your sales. When it comes to purchasing rental properties, the same principles apply. You need to be able to identify a good purchase from a bad purchase.

This requires some stable research into the local housing market, the good neighborhoods, and what your target market is looking for.

Are you looking to market to college kids living off campus? Are you looking to house seniors who need assisted living? Or are you looking to give a family a chance at living in a nice home?

The house and location you choose needs to be appealing to your target demographic so you can ensure you get the renters you need for the price range you are asking.

Things to consider when identifying your choice:

  • How many bedrooms does the house have?
  • How many bathrooms?
  • Does the kitchen have a dishwasher and garbage disposal?
  • How old is the plumbing? Electric?
  • Is there a pest problem?
  • Is this a multi-family or a single-family home?
  • What is the best rental price?

4. Business Model

Buying rental property does need to follow a bit of a business plan in order to be successful. To ensure that your investment yields a good return, you’ll need to sit down and weigh your costs versus your revenue. In the beginning you’ll likely be paying the mortgage yourself.

As revenue begins to flow in, you need to have already decided how you are going to allocate your earnings. What percentages go to home repair, mortgage, and personal revenue? Additionally, you need to consider how much you are going to funnel into outsourcing to a property manager when the time is right.

5. Outsourcing Rental Properties

Lastly, you are able to outsource your landlord responsibilities to a property manager. If you are just no good at home repairs or you need someone to help you manage your paperwork, you can hire a property manager to take care of all your rental’s needs.

While this will take a cut out of your profits, the property manager makes it so that you can sit back a bit and let that residual income flow in. In this case, you need to only check in regularly to ensure that everything is running smoothly.

This way, you can get involved only when big decisions about buying and selling need to be made. However, we do suggest you pick a reputable property management company in order to ensure that your earnings are being allocated properly.