November 9, 2022
The rental property market is one of the simplest to get into if you have a property that’s sitting empty. Starting from there, it can be almost free to get your foot in the door and start saving to expand the business. If, on the other hand, you have nothing to begin with, the process of how to start a rental property business takes some consideration.
Luckily, it’s possible to start at almost any scale, depending on your budget. The only real trick is doing the appropriate research. If you want to learn how to start a rental property business, you’re in the right place. There’s a lot to go over, but with a little guidance, it’s possible to get involved with very little experience. First, here’s a look at the industry as a whole.
Rental Property Market Overview
Global real estate rentals grew by a CAGR of 9.6% in 2022, a percentage that translates to over $200 billion. The war in Ukraine has prolonged the recovery of the global economy, but the rental market is still expected to be around $3,130 billion by 2026, at a CAGR of 7.2%.
Markets everywhere are affected by the war, as economic sanctions and supply chain disruptions wreak havoc in many countries. Still, the rental market is increasing, driven by macro, micro, and property factors:
The market cycle drives property prices in a number of different ways. It’s best to get into property investment at the peak of a contracted market cycle.
The unemployment rate also affects rental prices, as high unemployment usually reduces demand for growth in the rental market.
Population growth has the opposite impact on the market. An increased population represents a positive growth rate and usually signifies a healthy market and affordability of rentals.
Infrastructure plays a role in the rental market, as it has the power to attract and repel different demographics. New projects that support urban renewal can drive interest in an area and even create job opportunities that result in economic boosts and increased demand for housing.
Vacancy rates give a very handy indication of the demand for housing in an area. Low vacancy rates suggest there is more demand than supply.
Affordability relates to the ratio of income to house prices in an area, and in areas where people are expected to pay a high percentage of their income on housing, you can be sure the demand for rentals will be dropping.
The size, features, and location of a property itself are also drivers of demand. These factors need to match the consumer preferences in an area to be a good investment.
These are just a few of the numerous drivers that make rentals such a complex business to get into. Not only do these factors come with a sense of unpredictability, but there are other challenges to prepare for before you get started.
The most significant of these challenges is the recruitment and retention of qualified people to run the business. The pandemic has shifted the balance of employee demands, and it is a very competitive time to find good teams.
So, there’s a lot to consider when learning how to start a rental property business, but of course, if it’s done right it can be a good investment. If you’re able to get a few hundred dollars a month after all your expenses that can go into an emergency pot, you’re already starting off strongly. From there, it’s possible to expand or branch out, if you want to.
If you’re still interested in getting started, it’s probably the pressing question of startup costs that you’ll be interested in knowing about next.
Starting a Rental Property Business: Costs and Revenue Streams
When starting a rental property business, both your startup costs and revenue streams will depend on your business model. The main types of rentals are residential and commercial, and these can be subdivided almost infinitely too. On the residential side, you’ve got small housing, apartments, luxury villas, and everything in between; for non-residential, you could consider warehouses, offices, or shops.
You can then break up the models by online/offline, furnished/unfurnished, holiday/long-term, and so on. So, the global real estate market is finely segmented. This means that your startup costs are doing to depend heavily on many things.
Assuming you’re starting from scratch on a low budget, and you already have a property you’re ready to rent out, here are some of the things you might need to spend on to get started:
- Homeowners Insurance
- Cleaning supplies
- Building improvements for compliance and comfort
On a tight budget, it’s possible that starting a rental property business won’t cost a lot to begin. Again, this depends on whether or not you have access to a property you can rent out. Without this, your startup costs will need to include the down payment on the property itself.
This down payment will need to be roughly 15% to 25%, and you should set a goal of around 10% return on your investment when you pay for the place. Some say, as a general rule, you should make at least $100 profit on each rental, but of course, it’s possible to make a lot more.
The revenue streams from the rental business are all reliant on people filling the buildings and paying the rent. So it’s important to keep vacancies low and money trickling in. Still, the overheads don’t have to be too high to start with, and there is only a handful of ongoing costs to consider. Let’s take a look at some of those now.
How to Start a Rental Property Business: Expenses
While getting started might be as simple as opening an AirBnB account, there will be some ongoing costs to consider. If you’re going big, you’ll have a heavy marketing budget to take into account. Whether large or small, you’ll also be on the hook for maintenance, compliance, and taxes too.
Again, these costs will scale with the size and type of your business, but universally, the rent scales with those too, and this, ideally, makes them worthwhile. There are also many ways to make the process more efficient, especially when it comes to getting the attention you need to fill the property.
Marketing will be one of the major costs to consider when looking into how to start a property rental business, especially a large-scale one. The more properties you have, the more you’ll need to focus on attracting tenants. In a competitive market, this means finding the best way to reach your customers where they’re looking.
New technologies are being adopted by real estate agents of all kinds to stay competitive. Online listings are an obvious and ubiquitous example, but the adoption of VR tours, video promotions, and e-signing services are a few of the ways in which estate agents are making their properties more accessible and appealing over long distances.
Of course, it’s important not to overlook one of the most common and significant expenses of rentals: the rent. Chances are, if you’re building a rental business, you won’t own all the buildings outright. This means someone will be looking to you for payment, regardless of whether you fill them or not. These will be ongoing expenses, especially if you’re only paying the interest on the mortgage, and will need to be factored into your profitability calculation carefully.
How to start a rental property business: Calculating Profitability
Rental prices are in a constant state of flux, but the general trend is an increase. Your ideal profitability will allow for rent increases without your overheads increasing, but this isn’t always possible. One thing to remember is that even if you’re making $100 profit on each rental, over 20 years, that’s a significant return.
Further, over the course of those decades, you’re sure to have substantial appreciation to the value of the property, too, which you may or may not want to consider in your profitability calculations. So, how do you calculate profitability on rentals? Let’s take a look.
ROI on rentals is usually calculated by taking your annual rental income (12 x monthly rent) away from your annual operating costs. The number you’re left with is divided by the mortgage value to get to the ROI.
ROI = ((12 x Monthly Rent) – Annual operating costs) / Mortgage value
This calculation provides a simple overview of your investment prospects but doesn’t go into much detail. It’s possible to increase the complexity of the calculation to get a more detailed output when you take into account taxes, vacancy rates, maintenance, and other ongoing costs.
If you have little to no experience with these things, it’s worth starting here and only complicating the process as needed. So, what does all this amount to? Let’s go over some of the things you’ll need to pay attention to if you’re trying to find out how to start a rental property business.
How to Start a Property Rental Business
There are too many ways to begin a business like this, so we won’t list out every possible branch to consider. Instead, we’re going to take a look at some of the key considerations and processes involved in starting a rental property business. We’re going to assume that you’re ready to purchase a property for renting.
One of the first things you could try is running a rental market analysis (RMM)
An RMA is a market forecast for rentals that takes a look at specific factors to establish the potential of a property in the area in which it’s situated. It’s done by investigating several comparable properties and adding up key factors such as the price per unit of area. This is something that might be a good idea to run, at least as a rudimentary investigation, before purchasing a property for rental.
There are six steps to an RMA that will give you a basic metric from which to compare properties for their potential profitability.
1. Pick your resources – you should make use of as many of the cheap and free resources available to you online to find details of the properties you’ll be evaluating. Real-estate agents will have access to a lot of this information already, so if you’re working with one, they can help you out. But there are also plenty of online services too.
2. Organize your findings
A spreadsheet of your data needs to be drawn up so that you can easily compare what you find. You can find templates for this online too, and they will help you delve a little deeper than you’ll be able to if you just list some of the factors down. A good spreadsheet can show you patterns in your findings and allow you to see the effects of rental pricing increases and decreases as they project into the future.
3. Start gathering information
Now you’re ready to go out and get your data. Find out as much relevant information on each property as you can. Cover such things as the address, the features of the property, how many bathrooms it has, and so on. Then look into local amenities, how long the property has been listed, and how long it’s been on the market.
3. Gather all Information about the subject property
With the correct tools in hand, start tracking the necessary information about your potential rental purchase. Homebuyers and investors will pay attention to similar property factors like location, size, features, and price, but investors should also evaluate criteria like concessions offered, amenities, and days on the market. Do this for each property.
This part of the process doesn’t have to take long at all if you find the right site or real estate agent.
4. Gather information about the neighborhood
In this step, you want to evaluate whether the neighborhood is desirable for the renters you’ll be looking for. You’re going to want to use objective measures to show whether local properties attract quality renters. Some of the factors to look out for include:
- Access to public transport
- Clean roads and paved areas
- Good school ratings
- Dining out and shopping facilities
- Low crime rates
- Quiet spaces
- Lots of functioning businesses
Consider that your tenants will prefer to live in peace and safety if they can afford to.
5. Find similar properties
Now, look for comparable properties to hold up against the property you’re focusing on. You’ll want at least a few of these, to get a clear picture of the status of buildings with the same features in the same area. Make sure they’re within the same three-block radius, share a similar square footage and have the same rent price, even if you have to go with what you’re expecting to charge.
6. Do your calculations
With all this information you should be able to immediately calculate the price per square foot of the properties you’ve been looking at. The formula for this is very simple. It’s just the rental price of the comparable property divided by its square footage.
Take an average of the prices, and you can use this figure to calculate the rental prices of any similar potential rental investments, and it can be adjusted for occupancy rates and amenities if you want to go deeper.
With these calculations, you’ll be able to compare what you’ve researched to the available properties for sale and identify those with a high chance of profitability. When you’re ready to buy, you need to look into how to pay for it.
Most lenders for mortgages will ask you to put down 25% for rentals. This is much higher than the rates you’d expect if you were planning to live in the place. You’ll also need good credit to get a mortgage, to avoid that rate going any higher.
For help calculating your potential returns and creating lender or investor-ready projections, check out our rental templates here at ProjectionHub. We have an Airbnb, VRBO, short term rental projections template as well as a general rental property projection template for typical long-term property rentals. We have specifically-designed financial forecasting for rental property businesses and they’re totally customizable so you can adjust them to your specific needs. They also come with support included, so you can be sure you’ll be left with a professional-looking financial projection to take to your mortgage lender.
Depending on where you want to begin, setting up a business in rentals could be reasonably cheap. The market rises and falls, so it’s a good idea to time it right, but if you do, and you perform a rudimentary rental market analysis to get your comparable price-per-square-foot metrics, you can begin with little to no experience.
However, when buying, expect to pay a higher down payment than if you would be living in the property! Lenders want their cut of the rental money and aren’t as willing as you might be to take the chance on your research.
With all this in mind and the considerations we’ve listed here, you should be in with a good chance of getting started. And with our templates, you can present your financial projection in a professional and appealing format!