This advice has been selected from our popular Facebook Money Making in USA Group for investing in rental properties as part of the series “Where do Indians invest in the USA to make money“.
I liked the idea as the person who shared it has extensive experience and has shared his practical tips to survive and make money from real estate in the USA.
Do you know that Donald Trump has made his fortune in real estate? Why can’t you?
He says that if you want to invest in properties then create a model of how much return each property is providing.
This article will discuss:
Income From Rental Property
Here is one such profitable model which talks about how much rent to charge.
#1 Monthly Rent
The idea is to maximize the rental return on your property. The advice is to look for 10% or more of property value as yearly rent.
You can also calculate 10% of the total buying cost and then consider it as the target to achieve for 12 months.
If you are buying a single-family house for $300k in Boston, your aim should be to get at least
- $30,000 rent per year or
- $2500 rent per month
It is very difficult to get 10% of rent per month based on the property value.
Practically, I have seen that 90% of rental properties only fetch about 6% of their total cost. In our example, this would be around $1500 per month rent for a $300,000 property.
If you can fetch more than 1500 per month, then you are in the top 10% of rental property values.
How to Get Maximum Rent?
Maximizing the per month rent is a trade-off between reliability and continuous rent.
#1a Rent to Students
The maximum rent is paid by university students or single workers who club money to rent an apartment or a single-family home.
- The final rent is more than what a single-family can pay in 95% of cases.
- Students rent for shorter periods and can leave your property after a short period.
- Students are more prone to cause property damage than family.
Govind from our Facebook group shared his experience with renting in the Blue collared neighborhood easily fetches more than 10% rent. If you have a duplex, then it adds extra icing on the cake:
#1b Rent to People on Short term visit to the USA
Many people visit the US on short term assignments. They are usually highly paid executives using work visas like L1A and J1.
You should aim to find such person on local community groups from India, China, the UK, and the Philippines.
Ask for a job offer and visa details to vet the person’s financial status.
- Good salary and high paying capacity.
- Rent for short term and preferably a furnished apartment or house with bed, sofa, TV, and other utilities. You can ask for higher rent.
- Have a stable job as government agencies like the US embassy, USCIS and CBP verifies employers before issuing a work visa.
- No credit history in the USA. It is difficult to find a good tenant.
#1c Corporate Rentals Apartment
Since many ex-pats coming to the USA for the short term do not have a credit history, they face problems renting an apartment directly from the owner.
To solve this problem, their employers may rent an apartment and use it for their employee’s regular visits to the USA.
These kinds of opportunities are usually found through rental agencies and not on public forums. Connect with a good rental agent in your area for corporate rentals.
- This can fetch you a regular, secured, and high rent.
- Your rent is safe as you get the rent directly from the company.
- Longer lease terms – Companies usually sign up for long term lease like 24 months to 5-year contracts.
- Good opportunities exist in San Franciso, Seattle, Dallas, Charlotte, New Jersey, New York, and Chicago.
- Long term lease with inflation adjusted rent increase. Rent will not go up with market rates every year.
- Locked up in long lease – You are locked up in long term lease and cannot sell or re-lease till the rental term is over.
I know companies like Deloitte, Capgemini, TCS, Infosys, and others rent apartments in the US for their employees.
If you cannot manage the property yourself or want to take the headache of daily management and expenses, you can give it to companies like Blueground which can give you fixed rent for your property.
They then rent it out for corporate travellers.
#1d Rent on AirBnB
This would be my last choice but it can be good to make a profit quickly as the prices are per day.
- Good profit. You usually make a profit in bigger cities like San Francisco or Manhattan where the tourist traffic is high but not is smaller cities like St Loius, Charlotte, or Dallas.
- I do not advise it unless you are managing your property yourself full time.
- You have to count your man-hours spent in daily effort to rent and maintain the apartment vs the return on investment.
Many people have in the past invested in TimeShare rentals (or timeshare properties) primarily located in tourist places like Florida.
The profits are not easier to come by as they may be advertised by the TimeShare company. So, be alert and do your calculations before you sign the check.
They usually market their rental homes as a package in European and asian countries and then charge you for property management, promotional costs and a cut from your monthly rentals.
- As per my discussions with many people, they have found it difficult to break even.
- If the tourism season has been extraordinary and the rental multiplex is somewhere in Orlando, then you can also expect to get about 10% returns on your money.
You should plan for keeping 1-2 months per year as contingency for no rent.
In the real world, you do not get full 12 months of vacancy and should plan to leave the property empty for an average of 1.5 months per year.
This will help you plan the monthly rent amount appropriately.
If your plan is to make $1500 per month from a rental property in the USA, you should charge about $1714 per month to reach a yearly target of $18,000.
- Yearly target = $18000 as rent (6% of property purchase cost).
- Monthly rent: 18000/10.5 months = $1714.
- You can give discounts or move-in bonuses if the tenant signs up for a 12-month lease which means that you won’t get 1.5 months no vacancy that year.
- For 12 month lease, you can either give one month free (the last month, do not give the first month free) or reduce per month rent to $1500.
3. Property Appreciation
The capital appreciation or property valuation over time is another benefit that you get in the USA.
This depends largely on the city and the kind of job opportunities that place offers.
What most Indians whom I spoke to personally suggest for buying rental property in the USA for capital appreciation:
- Buy small property preferably a 3 BHK apartment or a single-family home.
- Buy it around and close to a university area so that tenants can be easily found. Renting to F-1 visa students fetches you higher rent than a family.
- Try to buy a property which is already rented and a tenant is already living there. This saves the gap period between buying and finding tenants and renting commission.
- Try to buy in a city where there are a lot of immigrant populations and jobs are available. High skilled immigrants like people on H-1B and L-1 come to the US for the short or medium-term and never default on rent payments.
- Always buy in the city where school ratings are above 7 out of 10 to retain good market value for your property in the long term. This also ensures high demand in case you want to sell it quickly.
All expenses on rental property are tax deductible before net profit.
So, add up your gross revenue (rentals) and then deduct all these expenses for paying taxes.
Depreciation is allowed on rental properties in the USA. Make sure you keep the basis updated and depreciate all updates or renovations that you make on your property.
You will need a qualified CPA to help you here. They know it better than you on how to claim certain depreciation on properties.
It is extremely important to claim the depreciation as its legally allowed by the IRS. This can make a huge difference in profit and loss of your rental business.
I suggest hiring a CPA as they can save you more tax than their yearly fees easily.
If you want to do it yourself, you may want to use software like Turbo Tax and HR block. They offer apps like Quickbooks (pretty good) to maintain your daily business costs and then help them deduct from your yearly tax return.
2. Property management
Most of the property management companies charge around 10% or more monthly commission to take care of your property if you cannot do the leg work yourself.
As per our experienced guest’s advice, you should aim to hire a third-party management company between 5 to 7.5% commission.
I agree with the advice to stay between a strict range. If you cannot find a company to manage property in less than 7.5%, then it is better to manage it yourself.
Find local property manager company near your real estate.
- Anything above 7.5% will eat into your own profits. You certainly do not want to put extra pressure on your pockets.
- This will also vary with how many man-hours you can spend out of your primary job. If you have to travel out of the city, then it is okay to eve hire a maintenance agency with a 10% cost than spending money on travel every month.
- For regular maintenance or emergency repairs, you can always find a handyman on eBay or Facebook marketplace.
If you own multiple properties (like more than 15 single family homes or a multiplex with more than 10 apartments) and are paying out huge fees monthly, you may want to create a new LLC for managing properties itself.
A property management software would make your life easier if you do decide to go that way.
Property tax can be a complete drain of your profits. Each state and county has its own tax rate in the USA.
More or less, the property tax outgo might remain the same as governments need it to run Schools and other things in the city.
Property tax is considered an expense and you can deduct it from your balance sheet to arrive at net profit.
I suggest to use a CPA here again.
4. Fixes (Maintenance)
You can count the maintenance cost to be around 20-50% of the rent in the first 1 to 5 years.
The maintenance cost usually goes down after 5 years based on what quality of stuff you have used in the house repairs.
Its always better to use a high quality (a bit more expensive) item in first repair itself to get a longer shelf life. It will help you in avoiding labor costs in the future.
All maintenance costs are counted as business expenses.
Utilities can be a huge expense per month if you include it with your monthly rent.
If you own a multi-unit property then you might have common electric, gas, water bill, etc. Keep an eye on this expense as it can quickly go out of hand.
Never include heat, electricity, and water in monthly rent unless it is forced by state law.
Tenants tend to overuse it if its included in the rent.
Home insurance is extremely important in the USA.
If you are buying the rental property under the umbrella of an LLC, it is recommended to buy general liability insurance too.
Invest in liability insurance as this will safeguard your personal assets like 401k, your personal home, car, and other stuff in case someone sues your LLC.
If you are serious about investing in multiple rental properties over time, then form an LLC for each property to shield yourself from liabilities.
9. Cost of financing
Bank will charge interest and closing expenses (loan processing fees) if you finance your properties.
Do account for these in your final excel sheet for the rental property’s balance sheet.
You can get zero closing offers on your personal home purchases but for commercial rental properties, these offers are difficult to find.
So, do plan for this cost as it can be as high as $12,000 for a $350k property.
As per my experience, 90% of rental properties only fetch about 6% of their total cost.
Monthly rent of about $1500 per month rent for a $300,000 property is considered okay.
Anything above 6% of the cost will be a good rent amount. If you can get about 10% rent, then you can count yourself in the top rental properties.
An H1B or L1 visa holder can buy rental property legally on his name in the USA.
A work visa allows you to make passive investments and make a profit out of them including investing in rental homes, stocks and more.
You can open a rental business using an H4 EAD card. The same holds true for L2 EAD.
An H4 EAD card is an open work permit and allows you to do any job or business.
You would also need to get a Real estate agent license and learn the local state property laws. An online education company like Real Estate Express can help you with learning laws and prepare for a state license exam.
An H1B or L1 visa holder can open an LLC on his name but as a sleeping partner.
You cannot be a manager on paper for the business and should not perform daily tasks.
The situation is critical if you hold H4 EAD and the extension is pending with the current card expired.
Your LLC will not be able to work and may have to be closed. There are a lot of factors that control this situation.
There are ways to mitigate it by hiring another person as a manager. Try to hire a person who has a US green card or is a citizen to make sure that your business can legally be opened even if you lose your EAD work permit.
You should talk to a business lawyer or a CPA to plan this contingency given the every changing visa situation in the USA.
You can manage and run the business even if you have to leave the USA.
The only possible way to get the USA green card with business investment is by way of filing an EB5 visa.
If your rental property investment can help you make enough money to file the EB5 visa, you can get a green card easily.
You can manage the property yourself as long as it is not a daily regular full-time work.
There is a very thin line between doing it yourself and hiring a property manager.
As long as it is a passive work like taking care of a house about once a week, it should not cause a problem.
There is no official written rule that I know of.
Do you have suggestions to add here? Please share it on the forum and we would be happy to share it with your name.