Tips on Taking on an Investment Property
It’s true that real estate investment could be a pathway to wealth, but it could also be a tragic mistake for investors who are not educated as to how to go about their investment journey.
Before you take the plunge, ask yourself these questions:
How is your personal debt?
If you are carrying a heavy burden of student loans, medical bills, credit card amounts, or children about to go to college, a rental property may be more of a drain on your expenses than a source of profit. Be sure to have cash on hand for emergencies, which could include repairs and mortgage payments. You want to have a solid financial safety net before you put out money for an investment property.
Will you be a hands-on landlord or will you hire a property management company?
Are you handy? If not, you may want to consider a property management company to handle the many fix-it requests that tenants often have. Of course, hiring a property manager may often reduce your revenue stream and profits — they often take a percentage of the monthly rent. Another way to go is to have a trusty network of professionals who go to your property when called: electricians, plumbers, painters, and cleaners, for example.
Have you found the right location?
Do your research before you take the investment step. Make sure the market is hot, with a growing population (including young people). The surrounding neighborhood should be vibrant with a low-crime rate. There should be easy access to public transportation, a walkable distance to markets and restaurants, and a nearby job market. These factors may make it easier for you to rent the property.
How will you finance the investment property?
Cash or mortgage? Of course, ultimately cash may be better, but not everybody is able to buy a property this way. If it’s do-able, cash can generate a healthy cash flow because you won’t have an existing debt (mortgage). However, that doesn’t mean that financing a property is not a good deal. Put 20 percent down on a house and get a mortgage with a low interest rate (they’re very common these days). With this in mind, keep your eye on interest rates — for investment properties, they’re often higher than mortgage rates for a traditional property. The idea is to find a mortgage rate that won’t reduce your monthly revenue stream and profits.
Are you prepared to expect the unexpected?
Remember that an investment property may come with some unpleasant surprises (meaning emergency expenses). Think roof repairs, burst water heaters, malfunctioning appliances and broken windows. Set aside an emergency fund (about 20-30 percent of your rental income) for these types of untimely happenings.
Are you aware of your legal obligations?
Get to know all of your landlord-tenant laws in your state. Be aware of your tenants’ rights as well as how you are expected to conduct yourself as a landlord. This includes collecting and holding security deposits, initiating evictions, fair housing laws, and lease language.
An investment property could be lucrative, but it also takes work, consideration and strategy. There are also stringent laws that apply to landlords and expenses (some unexpected) that may stand in the way of the revenue and profit you’re working toward. Make sure you choose a property in an active, growing market.