If you’ve thought of different ways of investing your money, you must have come across real estate investment and thought of it as a potential passive income source. This idea sounds brilliant. However, if you intend to run the investment yourself, it’s not as straightforward as having the monthly rent flowing in. With the current pandemic, the share market has become volatile, and interest rates are at rock bottom.
Numerous investors consider investment properties as a lower-risk option. In any case, buying a property means you need to find occupants, handle repairs and maintenance, and shuffle rental returns with a home loan. For some investors, the probability of sparing a couple of bucks by handling the property management themselves sounds enticing.
But the truth is, investing in real estate requires proper planning and understanding of the steps you need to take to make an informed decision. Highlighted below are some of the pointers you need to take into account before purchasing a rental property.
Find The Right Location
The worst thing that can happen is to find a property in an area that is declining rather than growing. The ideal location encompasses the state you intend to invest in, the city, and the neighborhood. The locality you choose to invest in will determine your investment return. A location where the local population is fast-growing with a revitalization plan on course poses a potential investment opportunity.
Real estate experts at ScopeOut note that one of the most important things to look at is the real estate trends and demographics of the location when looking for profitable investment opportunities. Use the latest reports to analyze the market and scope out neighborhoods before you invest in them. What you’re looking for is rich data on various neighborhood factors that will significantly impact your real estate investments in that specific location.
Buy or Finance, Which one?
The critical question you need to ask yourself is whether it’s better to purchase with cash or to finance your venture property. That will depend on your overall investment goals. When you pay in cash, you get a steady monthly income. Take, for instance, an investment property that costs $200,000 to purchase. The cash buyer could see $19,000 in annual profit or a 9.5% annual profit from the original investment with costs incurred such as rental income, taxes, depreciation, and income tax.
On the contrary, financing could give you a better return for an investor who pays 20% on the house, compounding the interest at 4% on the home loan. After removing working costs and any additional interest, the profit amounts to around $11,160 every year. Income is less for the investor, yet a 28% annual profit for the $40,000 venture is a lot more than the 9.5% made by the cash purchaser. So, consider your options carefully.
How Will You Manage The Property?
When most people think about purchasing investment properties, they’re regularly centered around a handful of factors such as month to month payments from tenants, additional expenses, etc. It’s normal for property owners to disregard how the property will be managed and by who. Ideally, you want tenants who pay the rent on time every month while following property rules to ensure your peace of mind. Unfortunately, this isn’t how things work in reality.
You’ll have to invest a lot of energy, resources, and some money too to manage your investment property. This frequently implies answering calls late in the evening in case of emergencies, making momentary fixes, and so forth. To save yourself these hassles, you should get a property manager. A property management company takes a percentage of the monthly rental income and handles everything involving tenants and your property.
For individual property owners, this isn’t an issue. For other people, they may not be comfortable paying a huge portion of their month to month rental income to another person, mainly if the house is worth $400,000 – $500,000+. However, it’s necessary to note that a trustworthy property management company is justified despite the cost because of the significant peace of mind it will give you.
The 1% Rule & the 2% Rule
This rule dictates that what you expect as rental returns should be equal to or greater than 1% in the 1% Rule and 2% in the 2% Rule of what you incurred when it. For instance, if you want to purchase a rental property worth $300,000. With the 1% Rule, your rental income should be equal to or greater than $3,000, not less than $6,000 in the 2% Rule.
These rules should guide an investor in accurately determining the overall cash flow expected, but they aren’t everything. An investor needs to consider other factors like property appreciation and the type of property they want to invest in. The big question is, can someone find properties that meet these rules? Undoubtedly, but they’re also not widely available.
The rules are more of a guideline to help you make the right decision. You have the freedom to purchase real estate properties that don’t fit either of the rules, but they still have to be profitable.
Understand the Risks
Financial investments don’t come without risk. Here are some of the risks you should know when it comes to investing in rental properties:
- The possibility of dealing with bad tenants
- Airbnb legal issues: For instance, you purchased an Airbnb real estate property in a place with simple or no Airbnb laws. In case they change, this will affect everything for you.
- Negative revenue stream – this is a point whereby the expenses and mortgage costs exceed your revenue. This differentiates decent investment property from a terrible investment property.
- Inconsistent real estate market
- Sometimes the income might not meet your entire mortgage debt.
- You can’t sell rental properties if the markets fall – unlike stocks, you can quickly sell them.
- Entry costs are very high, as well as exit costs.
- If you don’t have tenants, you still need to pay all the associated expenses.
Sometimes, investments produce more risks than rewards, but these shouldn’t deter you from your investment goal in real estate. Research more about the challenges that investors face so you can best avoid them.
Is it Worth Investing in Real Estate?
Most investments are a risk, and real estate is no exception. However, when done in the right way, the rewards exceed the risk. Real estate should generally help jumpstart your goals of early retirement. Ensure that you have considered these issues to help you make a concrete decision to make the journey even more successful. Do extensive research, consider the dos and don’ts, and finally, begin your path to financial freedom, made possible by rental income.