Tips for Investing in Your First Rental Property
Are you thinking about buying an investment property? Numerous of the world’s wealthiest people have come from real estate, therefore there are many reasons to believe it is a good investment.
Determine Whether You Have What It Takes to Be a Landlord
Being a landlord can be a lucrative way to make money in real estate, but it’s neither easy or glamorous. Aside from selecting the perfect property, preparing the unit, and locating reputable tenants, there are always maintenance concerns and hassles.
Do you know how to use a toolbox? How do you do when it comes to mending drywall or unclogging a toilet? Sure, you could hire someone to do it for you or engage a property manager, but it will reduce your revenues. To save money, property owners with one or two homes frequently conduct their own repairs.
Personal Debt Reduction
Debt may be part of a savvy investor’s portfolio investing strategy, but the average person should avoid it. If you have student loans, overdue medical bills, or children who will be attending college soon, buying a rental property may not be the best decision for you right now.
Obtain a 20% (or greater) down payment
Investment properties typically necessitate a bigger down payment than owner-occupied properties and have more severe approval criteria. The 3% down payment you made on your present house isn’t going to work for an investment property. Because mortgage insurance is not available on rental homes, you will require at least a 20% down payment. However, you may be able to secure the down payment via bank financing, such as a personal loan.
Find the Ideal Location
The last thing you want is to be trapped with a rental property in a decreasing neighborhood rather than one that is steady or growing. A city or location with a growing population and a revitalization plan in the works provides a possible investment opportunity.
Look for a location with low property taxes, a good school district, and plenty of facilities such as restaurants, coffee shops, shopping, trails, and parks when selecting a profitable rental property. Furthermore, a low-crime neighborhood with easy access to public transit and a developing job market may indicate a larger pool of possible renters.
Should You Purchase or Finance?
Is it better to buy a rental property with cash or finance it? That is dependent on your investment objectives. Paying in cash might contribute to a good monthly cash flow. Take, for example, a $100,000 rental property. The cash buyer might earn $9,500 per year after taxes, depreciation, and income tax, for a 9.5 percent annual return on the $100,000 investment.
Financing, on the other hand, can provide a higher return. For example, suppose an investor puts down 20% on a house, with the mortgage compounding at 4%. After deducting running expenditures and additional interest, the earnings total around $5,580 each year. The investor’s cash flow is lower, but the annual return on the $20,000 investment is substantially more than the 9.5 percent earned by the cash buyer.