Buying an investment property is not the same thing as buying a family home. This is the mistake that a lot of people make when preparing to enter this industry. Just because you’ve already invested in a property it doesn’t mean that you know what it’s like or what it takes to invest in the property market or to make money by investing in real estate. For a family home, you need to think about the potential for future expansion of your family, personal preferences and your future (both career- and lifestyle-wise). With an investment property, all that you need to worry about is the ROI. Here are some tips worth keeping in mind.
1. Have an investment strategy
The simplest way to describe the concept of having an investment strategy is to know what you want to achieve and figure out the steps necessary for you to get there. The world of property investment is no general exception to this rule. While you can develop your own efficient investment strategy, chances of this happening while you’re still an inexperienced investor are not that great. Fortunately, there are a lot of tested strategies that you can use. Any of these could make your transition into the world of property investment a lot smoother and give you a general sense of what you’re doing.
2. Capital growth or rental return
Perhaps the biggest question that you’ll have to answer when it comes to things that every property investor needs to know is whether you should ensure a steady capital growth or look for rental return. This depends on what you’re looking for- an overall wealth growth or a source of side income. Rental yield is usually simpler to manage, due to the fact that the value of the rent itself will more than cover the cost of the mortgage. In other words, you get someone else to pay for the real estate and in a couple of decades, you own the place. For this to work, however, you need to find a rental property that returns at least 1 percent of its value every month.
3. Learning how to screen your tenants
For the previous strategy to work, you need to have a tenant that’s reliable and solvent. This is why you need to learn how to screen your tenants which requires a strategy of its own. First, inquire about their current employment status. People with a steady job living with their significant other are more likely to stay for a longer period of time than students who just left their family home. Also, ask them about why they left their previous place. People move all the time and there are a lot of valid reasons for doing so. However, if anything appears to be, well, sketchy, you might want to reconsider making a deal with them.
4. Getting familiar with the issue of tax depreciation
Properties lose value over time which makes it unrealistic that you keep paying the same amount of taxes each year. However, in order to know just how much money you can deduce based on tax depreciation, you need a tax depreciation report made by professional and licensed surveyors. In theory, the equation needs to have a point at which the value of the asset reaches zero. Nonetheless, seeing as how this could never be the case with the value of the property, things are a tad different. Just keep in mind that this applies to the structure itself, not to the land that it was built upon. Such a report is worth drafting proactively, even if you don’t need to submit it to a suitable authority.
5. Finding and hiring a property manager
This person is pivotal for the success of your investment plan, seeing as how they will handle the issues regarding the maintenance of the rental property, tenant relations and more. In a way, they act as a buffer between you and the tenant which may become a major asset or advantage. Also, finding a great property manager early on is quite important, seeing as how it could encourage you to buy different pieces of property in the same city, rather than scattering your real estate assets all across the land.
6. Have enough money for the down payment
One of the most important things to keep in mind is that you need to have an asset that you can sell, the money you can borrow or some other mean of acquiring this capital. However, having access to just the money for a down payment isn’t all you need to secure. There are so many closing fees and later upgrades that you’ll have to make on the property. Keep in mind, however, that your ability to get a decent loan is a liquid asset on its own. Therefore, having reliable collateral (in a form of equity, mortgage or property) is always a good thing. Interestingly enough, the same goes for having a flawless credit score.
7. Start with the low-cost property
Experience is pivotal to success in any industry and acquiring experience takes time. When it comes to investing, regardless if it’s real estate or stocks that we’re talking about, you should never invest more money than you’re ready to lose. The advantage of investing in real estate lies in the fact that the value of investment can’t really reach zero. Also, even if you’re unable to sell the property, you can always move in here, however, you might also be able to get a lease on it. To make your investment somewhat safer, you can even look for best cities to invest in for real estate beginners, thus, narrowing down your search for ideal real estate property.
At the end of the day, your ability to make money on property investments depends on your organizational abilities and your skill to tackle your finances, tenants and property at the same time. Like any other form of investment, the key is to get a return that’s higher than the original investment (by a margin that will make it worth your while). However, property returns in many different ways, which makes this equation somewhat more complex.
This article has been contributed by Stella Ryne.