Are you considering buying an investment property? Many of the world’s richest people have come from real estate, so there are plenty of reasons to believe it is a profitable investment.
Experts agree, however, that before investing hundreds of thousands of dollars, it’s best to be well-versed in the field. Below are some of the Important Things to have at the back of your mind before Investing In Real Estate.
- Purchasing a rental property as an investment can be difficult.
- In most cases, buyers would need to put down at least a 20% deposit.
- Being a landlord necessitates a complex set of abilities, ranging from simple tenant law to the ability to repair a leaking faucet.
- Experts advise providing a financial reserve in case you don’t rent out the property or if the rental income falls short of the mortgage payment.
1. Do You Have What It Takes to Be a Landlord?
Do you know how to use a toolbox? How well do you patch drywall and unclog a toilet? You may employ someone to do it for you or hire a property manager, but all of these choices would eat into your earnings. To save money, property owners with one or two homes sometimes do their own repairs. Of course, that changes as you add more properties to your portfolio.
This isn’t a good idea for new investors, but once you get the hang of it, you won’t need to stay local.
2. Eliminate Personal Debt
Debt can be part of a smart investor’s portfolio investment plan, but the average individual should avoid it. Purchasing a rental property might not be the best choice if you have student loans, outstanding medical bills, or children who will be entering college soon.
Being careful is crucial, according to experts “If the return on your real estate is greater than the cost of debt, paying down debt isn’t important. This is the calculation you must do.” Pereira advises keeping a cash reserve. “Don’t put yourself in a situation where you can’t pay your debts because you don’t have enough money. Still have a safety margin in mind.”
3. Put down a deposit
Investment properties normally require a greater downpayment and have more stringent approval conditions than owner-occupied properties. The 3% down payment you made on your new home would not work on an investment property.
Since mortgage insurance is not available on rental assets, you’ll need at least a 20% downpayment. A downpayment could be possible through bank funding, such as a personal loan.
4. Find the Ideal Place
The last thing you want is to be stuck with a rental property in a deteriorating neighborhood rather than one that is stable or growing. A city or location with an increasing population and a revitalization plan in the works may be a good place to invest.
Look for a place with low property taxes, a strong school district, and plenty of facilities, such as parks, malls, restaurants, and movie theaters, while looking for a lucrative rental property. Furthermore, a low-crime community with public transportation and a rising job market can attract a larger pool of potential renters.
5. Should You Buy or Take Out a Loan?
Is it easier to pay cash for your investment property or to take out a loan? That is dependent on your investment objectives. Paying cash will help you have a healthy cash flow month after month. Take, for example, a $100,000 rental house. With rental revenue, fees, depreciation, and income tax, the cash buyer will receive $9,500 a year on a $100,000 investment, or a 9.5 percent annual return.
Financing, on the other hand, will provide you with a higher return. After operating expenses and additional interest, an investor who puts down 20% on a house and compoundes at 4% on the mortgage receives around $5,580 per year after taking out operating expenses and additional interest. The investor’s cash flow is smaller, but the 27.9% annual return on the $20,000 investment is far higher than the 9.5 percent received by the cash buyer.
6. Be wary of interest rates that are too high
While the cost of borrowing money may be low in 2020, the interest rate on an investment property is typically higher than that of a conventional mortgage. If you ever plan to fund your purchase, you’ll need a low mortgage payment that won’t take up too much of your monthly earnings.
7. Determine The Margin
Since, among other things, they must pay employees, Wall Street firms that buy distressed assets look for returns of 5% to 7%. Individuals should strive for a 10% return on investment. Annual maintenance costs should be estimated at 1% of the property value. Homeowners’ insurance, potential homeowners’ association dues, property taxes, monthly expenditures including pest control and landscaping, as well as routine maintenance expenses for repairs, are all costs to consider.
8. Purchase Landlord Insurance
Protect your new investment by buying landlord insurance in addition to homeowners insurance. This form of policy usually covers property harm, lost rental revenue, and liability protection2 in the event that a tenant or visitor is injured as a result of poor property maintenance.
9. Consider Unforeseen Expenses
Maintenance and upkeep aren’t the only expenses that can eat into your rental income. There’s always the possibility of an emergency arising, such as roof damage from a storm or burst pipes destroying a kitchen floor. Plan to set aside 20% to 30% of your rental income for these types of expenses so that you have a budget to pay for maintenance on time.
10. Stay away from a fixer-upper
It’s tempting to look for a house that you can buy for a low price and transform into a rental. If this is your first property, however, this is probably not a good idea. You’d be paying too much to renovate unless you have a contractor who does good work for a low price—or you’re an expert at large-scale home renovations. Instead, search for a home that is undervalued and only needs minor repairs.
11. Evaluate Capital Expenditures
Your new property’s operating costs would be between 35 and 80 percent of its gross operating profits. If you charge $1,500 for rent and your operating expenses are $600 a month, your operating expenses are 40%. Using the 50 percent rule to make it even simpler. Expect to pay $1,000 in net expenses if the rent is $2,000 a month.
12. Calculate Your Refund
What is your return on investment for every dollar you put in? Stocks may deliver a cash-on-cash return of 7.5 percent, while bonds may pay 4.5 percent. A 6% return in your first year as a landlord is considered good, particularly because it is expected to increase over time.
13. Purchase a Low-Cost Home
The higher the price of your house, the higher your monthly expenses would be. Some experts suggest beginning with a $150,000 home in a desirable neighborhood. Furthermore, experts warn against buying the nicest house on the block, as well as the worst house on the block.
14. Understand Your Legal Obligations
Landlord-tenant laws in their state and area should be familiar to rental owners. To prevent legal wranglings, it’s important to consider the tenants’ rights and responsibilities about security deposits, lease conditions, eviction laws, fair housing, and other issues.
15. Consider the Consequences vs. the Benefits
Every financial decision must be made with the goal of determining if the payoff is worth the potential risks. Is real estate still a good investment for you?
Keep your desires in check. Rental property, like any other investment, will not yield a big monthly paycheck right away, and choosing the wrong property may be disastrous.
Consider partnering with an established partner for your first rental home. Alternatively, rent out your own home for a period of time to see if you have the opportunity to be a landlord.