Many people have become wealthy from real estate investments, so it’s no surprise that it’s considered one of the most sound investments out there. Nevertheless, investing in property requires hundreds of thousands of dollars, so before you rush to your real estate tycoon destiny, you should have enough information to evade any possible risks.
Investing in property has the same goal as any other investment – to secure your financial future by increasing your wealth. But this doesn’t mean this will happen in any given scenario. While property investment usually delivers positive returns, to state that it’s always an instant road to riches would be a misconception. It’s crucial to determine if you’ll be able to reach your financial goals and to learn how to manage your investments in the right way. There are a lot of questions to ask yourself before you go down this road, but they all boil down to 4 major considerations.
WHERE Is the Main Question
If you think we should start with money talks – we are talking about money. And we’re talking about the most important aspect of it – how not to lose it when investing in property. Many real estate investors have fallen into the trap of discounted properties, not giving much thought to the nature of that discount, which is almost always the location. If you don’t research the area you’re buying into, you may actually end up paying more than the market value for your ʽdiscounted propertyʼ.
There are some common criteria considering the location of profitable rental property – lots of amenities such as movie theatres, restaurants, malls, parks, etc., a growing job market and low crime rates, decent school districts, and low property taxes. But looking only into these common criteria would be a mistake – you should take your targeted tenants into consideration since different generations have different preferences. This is why finding a profitable location requires a combination of leg work and consultation with locals and professionals. Checking other available properties in the immediate area and acquiring information will provide you with detailed insight such as which part of the street is considered to be a superior one.
And don’t forget to take into account any possible changes in the area – if there’s a major construction planned in the vicinity, that could easily decrease the value of the property. On the other hand, if a by-pass is planned, that means reduced traffic and an automatic value increase making the location a good place for investing in property.
How Handy Are You?
Of course, you don’t need to be a handyman to be a landlord, but if you don’t have a lot of spare cash then knowing your way around a toolbox should definitely be on your skills list. Maybe small repairs such as unclogging a toilet or repairing drywall might seem unimportant, but calling professionals for each of them will certainly take a bite out of your profits. Unexpected repairs are actually quite a big challenge for new landlords since they can happen before the rent checks start rolling in. As you add more rental properties to your portfolio and get the hang of real estate investment, you’ll be able to put together a team of contractors, handyman, and cleaners, but at the beginning of your venture, you should be able to fix as much as you can on your own.
How Much Are You Ready to Handle?
Even if you’re proud of your handyman skills, it’s extremely important to be realistic about your limits. You don’t want to end up with a larger investment property than you’re able to handle, so you should start small. Having an idea to invest in real estate is one thing, but getting grounded in that idea and deciding whether it’s the right step for you at this moment is a process.
As many people make the ʽdiscount mistakeʼ we’ve mentioned in the location section, many also make the mistake of thinking they can flip a good bargain into a rental property easily. Planning on extensive renovations is almost always a bad idea for the first property since fixer-uppers are quite a challenge. Venturing into such a risk requires a contractor who can perform quality work cheaply or enough skills for large-scale improvement. Any other way you’ll almost certainly end up paying too much for renovations and rehabilitation of the property, losing the profit. That is why the need for only modest repairs is equally important as the price at below-market rates when investing in property.
Beyond the Down Payment
Besides the fact that loan costs for investment properties are higher than owner-occupied properties, mortgage insurance is also not available, meaning you’ll need to make a down payment of at least 20 percent. But that’s not the end of the story and you should look beyond the fact you’re able to put together that much.
Don’t make the mistake of thinking you can go for high-interest rates in your first run. You won’t know that before you’ve had some experience. After your first investment, you’ll see that the income varies. Tenants are not there to stay forever, they come and go, and renting a vacant unit again may take a while. In the meantime, you’ll still have to pay insurance, property taxes, mortgage, and the bills. Add to that the possible need for renovation or repairs, and then you’ll get the picture.
This is why having a margin of safety is crucial. If you have any debts, make sure you pay them off before investing. And not only debts – if you have children ready for college, maybe you should wait until that hurdle is overcome. Financial stability is much more than mortgage calculation.
As you can see, the most important thing when it comes to investing in your first property is to be sure you can handle it on your own. Nobody is going to show you the right investment property, so you’ll need to do market research and acquire enough information to find a profitable area in which to sink your teeth into. You need to have a set of skills that will make you able to take care of the property before the profit starts coming in. You need to be completely aware of your limits and 100 percent sure in your financial stability.
This article has been contributed by Theodora Evans.