Thinking about purchasing investment property? Real estate has produced many of the world's wealthiest people, so there are plenty of reasons to think that it is a sound investment. However, experts agree, as with any investment, it's better to be well-versed before diving in with hundreds of thousands of dollars. Here are the things you should consider and investigate:
Do you know your way around a toolbox? How are you at repairing drywall or unclogging a toilet? Sure, you could call somebody to do it for you, but that will eat into your profits. Property owners who have one or two homes often do their own repairs to save money. This isn't advisable for new investors, but as you get the hang of real estate investing you don't have to remain local. If you're not the handy type and don't have lots of spare cash, being a landlord may not be right for you.
Savvy investors might carry debt as part of their investment portfolio, but the average person should avoid it. If you have student loans, unpaid medical bills, or children who will soon attend college, purchasing a rental property may not be the right move. It's not necessary to pay down debt if your return from your real estate is greater than the cost of debt. That is the calculation you need to make. Don't put yourself in a position where you lack the cash to make payments on your debt. Always have a margin of safety.
Investment properties generally require a larger down payment than owner-occupied properties; they have more stringent approval requirements. The 3% you may have put down on the home where you currently live isn't going to work for an investment property. You will need at least a 20% down payment, given that mortgage insurance isn't available on rental properties. You may be able to obtain the down payment through bank financing, such as a personal loan.
The last thing you want is to be stuck with a rental property in an area that is declining rather than stable or picking up steam. A city or locale where the population is growing, and a revitalization plan is underway potentially represents an investment opportunity. When choosing a profitable rental property, look for a location with low property taxes, a decent school district, and plenty of amenities, such as parks, shopping, and restaurants. In addition, a neighbourhood with low crime rates and a growing job market may mean a larger pool of potential renters.
Protect your new investment: In addition to homeowners insurance, consider purchasing landlord insurance.1 This type of insurance generally covers property damage, lost rental income, and liability protection, in case a tenant or a visitor suffers injury due to a property maintenance issue. To lower your costs, investigate whether an insurance provider will let you bundle landlord insurance with a homeowner’s insurance policy.
It's not just maintenance and upkeep costs that will eat into your rental income. There's always the potential for an emergency to crop up—roof damage due to a hurricane, for instance, or burst pipes that destroy a kitchen floor. Plan to set aside 20% to 30% of your rental income for all of these costs so you have a fund to pay for timely repairs.
It's tempting to look for the house that you can get at a bargain and flip into a rental property. However, if this is your first property, that's probably a bad idea. Unless you have a contractor, who does quality work on the cheap—or you're skilled at large-scale home improvements—you're likely to pay too much to renovate. Instead, look to buy a home that is priced below the market and needs only minor repairs.
Operating expenses on your new property will be between 35% and 80% of your gross operating income. If you charge $1,500 for rent and your expenses come in at $600 per month, you're at 40% for operating expenses. For an even easier calculation, use the 50% rule. If the rent you charge is $2,000 per month, expect to pay $1,000 in total expenses.
For every dollar that you invest, what is your return on that dollar? Stocks may offer a 7.5% cash-on-cash return, while bonds may pay 4.5%. A 6% return in your first year as a landlord is considered healthy, especially given that number should rise over time.
Rental owners need to be familiar with the landlord-tenant laws in their state and locale. It's important to understand, for example, your tenants' rights and your obligations regarding security deposits, lease requirements, eviction rules, fair housing, and more in order to avoid legal hassles.
Keep your expectations realistic. As with any investment, rental property isn't going to produce a large monthly paycheck for a while and picking the wrong property could be a catastrophic mistake. Consider working with an experienced partner on your first property or rent out your own home to test your landlord abilities.
Thinking about purchasing investment property? Real estate has produced many of the world’s wealthiest people, so there are plenty of reasons to think that it is a sound investment. However, experts agree, as with any investment, it’s better to be well-versed before diving in with hundreds of thousands of dollars. Here are the things you should consider and investigate: