If you’re looking for a way to generate a passive stream of income, real estate investing might be the answer. Of course, this type of investing isn’t for everyone, so there are a few things you should know before jumping in with both feet.
While purchasing a property and then renting it out can garner more than enough money to pay the mortgage, this investment option isn’t always as straightforward or as easy as it seems. If you aren’t sure where to start, the advice below should help you find your feet.
1. Consider Working with a Property Investment Advisor
So much goes into purchasing an investment property. There’s a lot to consider, including the income potential, associated expenses, property management, and more. While it’s certainly possible to address the concerns and run the numbers yourself, it’s easier and less risky if you work with a property investment advisor.
An investment advisor can help with things like investment and portfolio analysis, commercial due diligence, property condition reports, site selection studies, cash flow analytics, and lease analysis. You’ll feel much more confident in the purchase of an investment property knowing an expert has your back.
2. What is the Income Potential?
A rental property that doesn’t garner enough rental income will become a problem quickly. You need to do the math before buying anything. Use the standard 1% rule which states, “The monthly rent you collect from your tenants should be equal to or more than 1% of the property’s total value.”
So, for a $200,000 property, the monthly rent should be at least $2,000. Of course, this amount could be more or less depending on extenuating factors like your down payment and financing options. However, as a general rule, the rent should be enough to more than cover the mortgage each month.
3. Assess the Property’s Location
The property’s location will play a big role in its income potential and your ability to find quality tenants. When looking for an investment property, consider the proximity to things like good schools, recreation areas like parks, malls, and entertainment, as well as a neighborhood’s attractiveness to potential renters (is it clean and safe?). Keep in mind that even low-quality homes may be worth more if they are located near a university or some other large public venue.
4. Who’s Your Perfect Tenant?
The type of tenant you rent to will depend on how much you’re willing to spend and the type of property you buy. For example, apartments and small houses are better suited to students and single people while large homes with yards attract renters with families.
Keeping things simple inside the unit (neutral paint, furnishings, etc.) can help eliminate the need for expensive repairs and/or upkeep in between tenants, but if you’re hoping that your renters will stick around for a long time, making things more personal and colorful will help, even if it is a little more expensive.
5. Consider the Associated Costs
Unfortunately, you’ll pay more than just the list price for an investment property. There are closing costs, the down payment, property taxes (be sure to discuss these with your tax agent), insurance, and repair costs. You’ll also want to consider maintenance costs, which are typically higher the larger the property is. Also, you’ll want to get an inspection done before purchasing, which is another expense. As you can see, these costs can add up fast. Purchasing an investment property is more involved than it seems, so it’s a good idea to look into the things above before committing to anything.