Well, there is good news for you. The amount of background knowledge or experience you need to have to get into rental properties can be tailored to exactly how much you want to bother getting. There are ways to buy rental properties with minimal knowledge and experience required, and there are ways to buy rental properties where you would need quite a bit of knowledge and skill.
I’m going to break down the list of “must-haves” into two categories:
- Required knowledge for ALL rental properties
- Optional knowledge not required on all rental properties
There are certain things you need to know that pertain to any rental property you could possibly encounter. Those are the required bits of knowledge you need. Then there are rental properties with certain circumstances in which you would need those optional bits of knowledge. Get me?
OK, here we go.
Non-Negotiable Knowledge You Should Have Before Investing in a Rental Property
I put the word “should” in the title because I certainly can’t force you to have any or all of this knowledge before diving into a rental property, but I definitely think you should not consider going forward on a property without knowing at least something about these things.
You must know how to analyze the calculations involved with a rental property. Why? Because the whole point to owning a rental property is to make money, right? So make sure a property is actually projected to put cash in your pocket. For detailed information on calculating rental property numbers, check out “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”
This pertains to both the general market you are buying in and the more specific areas or neighborhoods of that market. The reason this matters is because those fundamentals — the stability and trends of a market or neighborhood — could dramatically impact whether or not you ever see a profit from your property. I can give you a couple articles to check out that speaks more in detail to this: “How to Know if Any Given Real Estate Market is Wise to Invest In (With Real Life Examples!)” and “How Do Real Estate Markets Differ and Which Should You Buy In?”
Those should help get you started in understanding general market information, and then for specific neighborhoods you really want to be in touch with someone very local to that area, preferably a property manager or a real estate agent who deals with rentals on a regular basis, and ask them about things like rentability, any saturation problems, tenant pools, vacancy issues, etc.
Anytime you buy a property, you should plan to conduct a certain level of due diligence (DD) on that property before signing your life away to it. The minimum amount of DD I do on the most basic of rental properties involves confirming the property’s condition by hiring a certified property inspector to do a full assessment and verifying income and expense numbers, such as rental rates, property taxes, and insurance. Then you have basic things like reading through all of your contracts and working with your lender, but those two things — the inspection and the verification of numbers — are important ones.
Value of a Good Tenant
Whether you are the one finding tenants for your properties or you have a property manager finding tenants, I really encourage every rental property owner to at least be up on why a good tenant is the best thing that could ever happen to you. Knowing this will help you deal with your own tenants, or it will help you in monitoring what your property manager is doing.
For instance, I had a bad tenant recently in one of my properties, and even though my property manager handles the property, because I knew how risky a bad tenant is and how valuable a good tenant is, I was able to come up with a solution for the situation (and man, did it work out well!). Had I not understood how risky a bad tenant can be, I probably never would have had so much heat around this. So understand why a good tenant is valuable, but one way to know that is to know why bad tenants are the worst thing that can happen to you (hint: vacancies, evictions, repairs — they all get expensive).
No, not the property taxes; I mean your own taxes. One of the absolute best perks of owning a rental property is the tax benefits. Essentially, you can (and should) end up with tax-free income on your rental property. I highly encourage every rental property owner to work with an accountant who specializes in real estate in order to maximize the benefits owed to you through your property. If you don’t want to work with an accountant, this is an area you want to brush up on in a big way! I personally have no interest in knowing tax details so I pass it to an accountant. And don’t trust TurboTax for these benefits either. My TurboTax days ended when I bought rental properties.
If you are working with a very straight-forward rental property (like one that isn’t in shambles or in an area where guns rule the land), you probably know enough to know whether or not you are securing a decent rental property for investment.
Now, things aren’t always that straight-forward. The following bits of information that I encourage you to be familiar with are only an issue if they pertain to the particular property you are looking at. I would consider any property that involves any of these things to be a more “advanced” rental property, if you will.
Advanced Knowledge Helpful in Dealing with Rental Properties
Again, these things won’t pertain to all rental properties, so just focus on the ones that pertain to what you are looking to get into. Or use this list to encourage you to stay away from the more complicated (i.e. risky) properties if the idea of dealing with any of these things doesn’t jive quite right with you.
If a property you are looking at is not in rent-ready condition, be ready to start the rehab. Or maybe you are intentionally trying to get into fix and flips or the BRRRR method — things that have rehabbing as part of the gig. Rehabbing is totally fine, but if you are getting yourself into that, be sure you know what you are doing! Don’t go into it blind or make assumptions on the scope of work or budget.