Thinking of buying a property and turning it into a money-making machine? Smart thinking! Real estate is not only one of the best places to invest money, but one of the safest as well. Though there are numerous strategies to enter the business, buying investment properties is the most common. These are properties that you buy for the purpose of renting them out and creating an added source of rental income.
You may think that this is the easiest way of becoming a real estate investor; however, it’s not as simple as it seems. In fact, there are many stories of beginner real estate investors who ended up losing instead of making money with rental properties. This is why you should never buy real estate unless you know what you’re really getting into. Are you ready to be an owner of investment properties? Answer the following questions to find out.
Question 1: How Much Do I Know About the Real Estate Business?
Real estate is a business just like any other and, although investing is mostly learning by doing, you can’t be part of that business without some general knowledge. Do you know how the market works? What about the market trends that affect property prices, the different types of investment properties, strategies and financing options? Start familiarizing yourself with the different real estate investing terms and vocabulary that you wouldn’t normally hear outside the industry like cash on cash return, cap rate, appreciation, internal rate of return, etc.
Yes, there is a lot to absorb about real estate before going ahead and buying a rental property. You can’t expect to learn everything overnight, but you can start today! Books, online courses, and blogs are all great, easily accessible resources that will teach you everything you need to know. You can also try to reach out to experienced real estate investors as mentors to share some of their experiences. This will help you know what to avoid and how to deal with the challenges of owning investment properties.
To learn anything and everything about real estate investing, continue reading our blog!
Question 2: Are My Finances in Order?
Money is the biggest obstacle for a first-time property investor. So to guarantee successful real estate investing, make sure your finances are in order before making any purchase. If you’re planning on buying a rental property with all cash, you need to have enough to cover both upfront costs (like the purchase price, closing costs, emergency fund, etc.) and ongoing costs (property tax, insurance, maintenance, etc.).
One of the benefits of investing in real estate is that you don’t need to have bags of money to start. Most real estate investors buy their first investment properties with little money by taking out a loan. If this is what you aim for, you need to know which property financing option will work best for you. Should you go for the old-fashioned conventional mortgage loan, private money loan, hard money loan, or seller financing?
Related: The Many Ways for Financing Real Estate Investments
As a property investor, you need to know the requirements and outcomes of each loan type. Moreover, you must be aware of interest rates, set a budget for the down payment, and never buy investment properties you can’t afford. Once you have your finances in order, you can determine which way is best for financing your first rental property.
Question 3: Where Should I Buy Investment Properties?
One phrase that you’ll always hear in the real estate investing business is location, location, location. As a new property investor, you might be thinking of buying in your local housing market simply because it’ll be close to you. However, this is not always a smart move. Where your rental property is located determines its value, expenses, cash flow, and many other factors that affect its profitability.
The best places to buy investment properties are those with a strong economy, growing population and job opportunities. These are the main factors that lead to high rental demand which, in turn, leads to a high occupancy rate and real estate appreciation. These are essential for successful real estate investing which your local housing market might not provide.
In order to decide if buying a rental property is a smart decision based on your location, you need to perform a real estate market analysis. This will show you how your market is performing. To save time, use Mashvisor’s rental property calculator to start analyzing and comparing rental properties in different cities and neighborhoods across the US housing market and identify the most profitable ones.
Related: Rental Property Calculator: Why Every Real Estate Investor Needs One
Question 4: What Type of Investment Properties Is Best for Me?
After determining that you’re in a good location to buy a rental property, the next question you should ask yourself is: Which type of property should I buy? Investment properties come in different shapes and sizes – there are single-family homes, multi-family homes, townhouses, condos, beach homes, etc. First-time real estate investors are advised to start out with single-family homes as they’re easier to finance and manage.
To find the best property to invest in, investors perform an investment property analysis. This will let you know the potential return on investment of each property which, since making money is what you aim for, is something you need to know before making a purchase. The investment property analysis allows a property investor to analyze and compare different investment properties by calculating the cash on cash return, cap rate, and potential rental income of different investment properties to find the best one. Mashvisor’s rental property calculator does exactly this and more!
To start analyzing the best investment properties in any city and neighborhood of your choice, click here.
Question 5: What Is the Optimal Rental Strategy?
After buying your first rental property, the last question to answer is how to rent it out. Investment properties can be rented out either traditionally (for long-term tenants – more than a year) or on listing sites such as Airbnb (for short-term tenants – usually from one night to six months). Both rental strategies have their pros and cons and the optimal one depends on a number of factors like the location, type of rental property, rental demand, etc.
If you’ve performed both a real estate market analysis and an investment property analysis, then you should have your answer! If renting out for short-term tenants turns out to be the optimal rental strategy, then you should check if Airbnb is even legal in your housing market. Also, do some research and learn how to optimize your listing, advertise your rental, get positive reviews, and generally how to run an Airbnb business.
Related: Four Things to Consider Before Purchasing an Airbnb Investment Property
The Bottom Line
While there are other questions one should think about before becoming a property investor, the above are the most important ones. If you believe you’re ready to start investing, let us help you! Mashvisor provides real estate investors with the property finder – a tool that will turn your property search into 15 minutes! To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.
To learn about your options for signing up for our services, click here.