Are you thinking of investing in a pricey investment property? Well, why not? Because real estate has turned out to be one of the most lucrative business opportunities ever. There are many reasons why you should strike it when the iron is still hot.
But like all businesses, think about venturing into it and gauge the various risk factors it involves. So, before you dive into it, here are certain pointers to look into.
Are You Up for Being the Quintessential Landlord?
Being a landlord is a great feeling, but it also involves certain responsibilities. Ask yourself these questions before diving into real estate. Are you handy with a toolbox? Can you repair drywall or unclog a toilet? Well, you can always hire somebody to do such things for you, but then it would be eating away at your profits.
People who are multiple property owners very often do their own thing, mainly to save money. You can always enlist the help of a property manager as some people do. But then, for new investors, it is probably not a good idea.
Imagine hiring cleaners, contractors, and handyman? You don’t have to be a professional handyman, but it is always good to know certain things to ensure that you amplify your profit, not the other way around. So ask this question are you cut out to be a good landlord?
Skim Down Personal Debt As Much As Possible
If you are a good investor, you may carry debt as part of your portfolio investment strategy. But it may not be exactly feasible for the average investor. If your credit score does not look too good and you have many student loans, unpaid medical bills, or children who may be attending college soon, then purchasing a rental property isn’t what you should be doing right now.
It is always good to be cautious, and you also have to make that all-important calculation, whether the return from your real estate will be more than your debt. Ensure you keep a margin of safety.
Pay Off the Downpayment
Investment properties may need you to make a greater downpayment than the owner-occupied properties. Also, they may have more strict hard-to-abide-by approval requirements. The 3% you put down on the home where you presently stay isn’t going to be enough for the property.
For that, you may require at least a 20% downpayment, as you may not be able to secure mortgage insurance on rental properties. You may obtain the downpayment via personal loans.
The Location is Also a Deciding Factor
Always select a rental property where a population is growing instead of dwindling. This presents a potential investment opportunity. You should select a location where it offers low property taxes, a good school or two in the neighborhood. Other decent amenities include parks, malls, restaurants, and theaters. Also, easy transportation facilities are another thing that you should ensure. Also, don’t ever rule out a place that promises a good job market. This may mean a slew of potential renters waiting to rent out your apartment.
Take a Decision Whether You Want to Buy or Finance?
Do you want to pay cash, or you want to finance your investment property? It may come down to one thing, your investing goals. Paying cash may help you ensure a recurring cash flow. For instance, if you get a rental property that costs around $100,000.
And with rising rental income, taxes, depreciation, and income tax, the cash buyer may get $9,500 in annual earnings, which may get you a high as 9.5% annual return on the $100,000 investment.
On the other hand, financing can promise a higher return. For instance, an investor puts down 20% on the house, compounding 4 % as interest on the mortgage. After leaving out other expenses and additional interest, the earnings can be an average of $5,580 each year.
The Sudden Costs to be Wary Of
Buying a house for investment purposes or otherwise can promise several underlying costs, read maintenance costs that can reduce your rental income. Don’t forget. There may be emergency costs too that you cannot overrule. Things like roof damage from a hurricane or burst pipes have the potential to destroy the kitchen floor. Keep aside 20% to 30% of your rental income to cover these sudden costs.
Go over these pros and cons, and only then, think about investing in a rental property. Good luck with your new enterprise!
