Real estate has produced many of the richest people in the world so there are plenty of reasons to believe a property is a good investment. However, as with any investment, it's better to be well versed with hundreds of thousands of dollars before diving in. Before beginning a new career as a real estate tycoon, equip yourself with the details below!
Make sure it's your way around a toolbox, do you know? How do you patch drywall or unclog a toilet? Sure, you can call someone to do it for you, but that's going to eat into your earnings. Owners of properties that have one or two homes sometimes do their own maintenance to save money. If you're not the handy kind and don't have a tonne of cash spare, becoming a landlord may not be the best thing for you.
Pay Down Debt First Savvy investors may carry debt as part of their investment portfolio but this should be avoided by the average person. Purchasing a rental property from a site like for sale by owner may not be the right move if you have student loans, unpaid medical bills or children who will be attending college soon. Being prudent is important, paying down debt is not necessary if your return from your property is higher than the debt expense. That is what you need to calculate. But don't put yourself in a position where you do not have the cash to make payments on your debt. Also, have a healthy margin.
Get the properties of Down Payment Investment typically require a greater down payment than the properties occupied by the owner, and they have more stringent approval criteria. The 3 percent that you may have put down on the house that you actually live in will not be suitable on an investment property. Given that mortgage insurance is not available on rental property, you would need at least 20 percent.
Beware of high-interest rates Cost of borrowing capital may be fairly cheap right now, but interest rates on an investment property would be higher than typical interest rates on mortgages. Note, you need a small mortgage payment that doesn't eat too drastically into your monthly income.
Calculate The Margins Wall Street companies purchasing distressed assets are looking for returns of 5 to 7 percent because they have to pay employees. Individuals will set a 10 percent goal. Estimate maintenance costs at an annual value of 1 percent of the land. Other costs include insurance, potential association dues for renters, real estate taxes, and regular expenditures such as pest control and landscaping. Even instead, there is insurance for tenants.
Stop a Fixer-Upper Searching for the house you can get at a bargain and turn into a rental home is an enticing one. If it's your first house, though, that is probably a bad idea. You are likely to spend too much to renovate unless you have a contractor who does professional work on the cheap — or you are experienced in large-scale home renovations. Look instead for buying a home that's priced below the market and requires only minor repairs.
Calculate Maintenance Expenditures Operating costs on your new property would equate to between 35% and 80% of your total operating income. If you charge them rent for $1,500 and your expenses come in at $600 per month, you're at 40%. Using the 50 percent law for an even simpler estimate. If the rent you owe is $2,000 a month, expect total expenses to be charged at $1,000.
Determine Your Return: What is your return on the investment for every investment you invest? Stocks can have a cash-on-cash return of 7.5 percent while bonds can pay 4.5 percent. A 6 percent return is considered healthy in your first year as a landlord, particularly given that number will increase over time.
Get a low-cost home The more costly the home, the greater will be your ongoing expenses. Some experts are suggesting a $150,000 home launch.
Look for low property taxes, a good school district, a neighbourhood with low crime levels and an area with an increasing job market and plenty of facilities, such as parks, shopping centres, restaurants, and movie theatres.
Danger vs. Reward Each financial decision is about balancing the incentives, assessing the payoff against the danger. Does the for sale by owner real estate investment make sense for you?