The real estate produces many of the world’s wealthy people, so there are many reasons to think that property is a sound investment. However, like any investment, it is better to be well-versed in the area before diving in it. Unlike purchasing stock, which may cost one dollar or two per share, you could easily spend six figures on your first property. Array yourself with the information below before starting your new career as a real estate tycoon.
1. Make Sure It is for You
Do you know how to use a toolbox? Better said, do you have one? How are you at repairing drywall? Alternatively, unclogging a toilet? Yes, you could call somebody to do it for you, but that will shorten your profits. Property owners of one or two homes often do their repairs to save money. If you are not a “get your hands dirty” type and you do not have lots of spare cash, maybe being a landlord is not the right thing for you.
Your first property will require a lot of your time as you learn the ins and outs of being a landlord. Think of it as an additional part-time job. Do you have the time?
2. Pay Down Debt First
Savvy investors might have debt as part of their investment portfolio, but the average person should not. If you have a student loan, unpaid medical bills or your children will soon go to college, buying a rental property may not be the right move.
3. Got the Down Payment?
Investment properties need a larger down payment than an owner-occupied building and have more harsh approval conditions. The 3% you put on the home you are living in is not going to work for an investment property. How much will you need? At least 20%, given that mortgage insurance is not possible in rental properties.
4. Beware of Higher Interest Rates
The cost of borrowing money could be cheap right now, but the interest rate on an investment property will increase. Remember, you require a mortgage payment that is small enough so that it will not eat too massively into your monthly profits.
5. Calculate Your Margins
The big firms at Wall Street that buy distressed properties aim for 5% to 7% returns because they have to pay workers. People should set a goal of 10%. Estimate maintenance costs at 1% of the property value every year. There’s also insurance, HOA fees (if applicable), property taxes and monthly expenses such as pest control and landscaping.
6. Don’t Buy a Fixer-Upper
It is tempting to look for the home that you can get at a good deal and convert it into a rental, but if this is your first home, that is probably a bad idea. Unless you have a cheap contractor with a good quality history – or you are skilled at large-scale home improvement – you are likely to pay too much to renovate. Instead, look to buy a home that is priced below the market that needs mostly minor repairs.