Before you buy a rental property, consider three things: the expected amount of rental income, the annual expenses you will incur, and the risks that may come along.
An investment property should be about increasing your wealth and securing your financial future. There is however, a common misconception that property investing always delivers positive returns, while this is true most of the time it certainly isn’t an instant road to riches. You need to keep in mind that how effectively you manage your investment will determine whether or not the investment helps you reach your financial goals. The cost of owning an investment property can be surprisingly low after you take into account your rental income and the tax deductions you’ll be entitled to.
1. Choosing the right property at the right price
2. Do your sums – Cash Flow is always king!
3. Find a good property manager and let them to do their job
4. Understand the market and the dynamics where you are buying
5. Pick the right type of mortgage to suit you
6. Use the equity from another property
7. Negative gearing
8. Check the age and condition of the property and facilities
9. Make the property attractive to renters
10. Take a long-term view and manage your risks
Also here are other pointers:
Eliminate your debt
- 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. Pereira agrees that being cautious is key, saying, “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. However, don’t put yourself in a position where you lack the cash to make payments on your debt. Always have a margin of safety.”
Save up the down payment
- 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. Pereira agrees that being cautious is key, saying, “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. However, don’t put yourself in a position where you lack the cash to make payments on your debt. Always have a margin of safety.”
Count on higher interest rates
- The cost of borrowing money might be relatively cheap right now, but the interest rate on an investment property will be higher than traditional mortgage interest rates. Remember, you need a low mortgage payment that won’t eat into your monthly profits too significantly.
Add up your operating expenses carefully.
Calculate your return on investment.
- Wall Street firms that buy distressed properties aim for returns of 5% to 7% because they have to pay staff. Individuals should set a goal of 10%. Estimate maintenance costs at 1% of the property value annually. Other costs include insurance, possible homeowners’ association fees, property taxes and monthly expenses such as pest control and landscaping. And then there’s landlord insurance.
Remember the number one rule: find the right location
- When choosing a profitable rental property, look for low property taxes, a decent school district, a neighborhood with low crime rates and an area with a growing job market and plenty of amenities, such as parks, malls, restaurants and movie theaters.
Avoid fixer-uppers
- 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.
Buy less than you can afford
- The more expensive the home, the higher your ongoing expenses will be. Some experts recommend starting with a $150,000 home.
Don’t try to impress your friends
- 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.
Make sure the time is right
- 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. If you’re not the handy type and don’t have lots of spare cash, being a landlord may not be right for you
There’s been an enormous upswing i the number of (smart) people putting money into real estate as a viable investment opportunity. We need to remind you, right off the bat, that real estate won’t make you rich overnight. It will, however, dramatically increase your net worth in the longer run. In other words, there will be a payoff.
Before you take your first drive around neighborhoods or step a single foot into an open house, you will need to know how much you can afford to spend on your fledgling real estate venture, and what are the most common responsibilities that come with the purchase.
Follow these tips, keep your wits about you, do the homework, and leave yourself a back-up cushion. You may just be the country’s next enviable real estate mogul and a role model for investors to come.