Thinking about becoming a property investor? Be sure to do your homework before you dive in.
For many in wealth management, real estate continues to represent a worthwhile investment and, after a year of record house prices, who can argue? According to the Federal Housing Finance Authority, the home price index rose by a staggering 8.4% compared to the previous year, and the median home price is anticipated to be $380,300 by the year’s end. But, for those looking to purchase their first investment property, it’s still important to remember that profit is never a given and you’ll need to carry out plenty of research if you want to see worthwhile returns.
Scouting
The most important step in the investment process always comes at the start. Identifying a sturdy property in a promising location takes time and careful deliberation. As you search, you’ll need to pay close attention to buyer trends and areas predicted for high growth. This information will also help you to determine how much you can charge for rent once the property is ready.
Look at other properties in your area to get a feel for the prices, and don’t forget to factor in utilities and taxes. If the area is up and coming, you might want to consider charging a little more for your rental, as the demand may be higher than it was previously.
You should also try to ensure that you understand the fundamentals of tenant laws, property maintenance, loan options, and administration. If you become too reliant on the consultancy of others, there is every chance that you’ll end up losing money to brokers or in the swamp of bureaucracy, during the sale process.
Finding properties worthy of investment can be a challenge. A good place to start is with auction sites – these can give you an insight into residential markets, help you to understand costs, and maybe even flag up properties that you might be interested in bidding on. You should also aim to use online directories to educate yourself on the features that most considerably contribute to the sale price. If you struggle with independent research, don’t be afraid to reach out to investment associations for advice – a good tip is always worth the consultancy fee.
Purchasing
When it comes to purchasing, the property type and amount of property you can afford will depend upon the usual factors: annual income, monthly debt, free cash, and the location of the property. Credit Karma points out that it’s important, before you make an offer for a property, to get pre-approved for a mortgage. Pre-approval will allow you to set clear price parameters and to react immediately if you see a good deal. Take the time to structure your finances and work out what you can afford before you proceed to the buying stage.
Remember, when it comes to mortgages, your down payment is dependent on credit score and mortgage type (adjustable or fixed-rate). A mortgage often makes sense for an investment property even if you have the funds for a cash purchase, as you can then use your remaining spare cash to invest elsewhere or in other properties, ultimately benefiting from increased rental income/multiplied appreciation.
It is common for investors to purchase fixer upper properties because they are looking for a good deal and the option to customize a few things for a lower cost. However, be careful about homes labeled “as is” as these properties have more substantial problems. For instance, you might discover mold, a cracked foundation, a leaky roof, or other major repairs. If you decide to move forward with an “as is” property, consult with a lawyer and real estate agent who are experienced in these kinds of purchases to ensure you are making a wise financial decision.
Protecting Your Investment
A home warranty can be a valuable asset in protecting your investment property. It acts as a safeguard against the high costs of repairing or replacing major systems and appliances that break down due to normal wear and tear. This is particularly crucial for investment properties, where such unexpected expenses can significantly impact your rental income and maintenance budget.
With a home warranty in place, you can ensure that critical components like HVAC, plumbing, and electrical systems, as well as appliances like refrigerators and ovens, are covered. This not only helps in maintaining the property in good working order but also adds value to your investment by ensuring a comfortable and functional living space for tenants. To fully appreciate the benefits and limitations of this coverage, it’s important to learn more about what a home warranty is, how it differs from homeowners’ insurance, and what specific terms and conditions apply. This knowledge will empower you to make an informed decision that maximizes the protection and value of your investment property.
Self Managing
Buying an investment property is one thing, managing it is another. Depending on your starting point (how much cash you have available), you may find the work/ROI ratio fluctuates. A large investment does not necessitate more work and ultimately results in higher profit. For example, it can be easier to acquire a loan for a multi-family property, and property management is usually offset by a higher cash flow.
As a universal rule, however, the more work you’re willing to put in, the more you’re likely to profit. It all starts with actually launching your venture. You’ll need to select a business structure before writing up your business plan and starting your marketing campaign. A formation company can walk you through setting up an LLC in Minnesota. If you use each step strategically, you’ll be in a great position to hit the ground running with your new business.
Hiring a Property Manager
If you’re time short and happy to cover the cost of help, it’s worth enlisting property managers to help with the day-to-day running of your investment. The right company can take all the stress out of finding, screening, and charging tenants. They can also handle maintenance on your behalf, work with contractors, and their services are often tax-deductible. If you’ve ever been a landlord, you’ll know that something as simple as email correspondence can take up huge amounts of time.
Make Informed Decisions
As you move towards buying your first investment property, remember that research is your best advantage and your damage limitation. If you can draw the right knowledge from your available resources, there’s no reason why you can’t benefit tremendously from your next venture.
Guest Post by Denise Long of GrandMothering
