Beginner’s Guide to Real Estate Investing
If you’re anxious about putting together a viable retirement plan, consider buying real estate — for someone else to live in. If done wisely, investing in rental properties can increase your monthly income.
Although 2014 is seeing a rise in home-buying in many areas — making it a seller’s market, which may also be carrying home prices upward with it — this year also continues to see a jump in rental prices. Apartment Guide recently reported that the nationwide median entry-level rent price increased 1.44 percent between April and late June. A study by the Joint Center for Housing Studies of Harvard University backs up that trend; the center noted a 4 percent rise in rent between 2011 and 2012.
Still, purchases of investment properties are surprisingly not up, according to the National Association of Realtors. Last year, the association found that purchases of real-estate investments dropped 8.5 percent.
Rent is up, yet fewer people are taking advantage of that potential investment. Now may be an ideal time to hop on that “retirement plan.”
If you are considering real-estate investing, here are some beginner tips to get you started:
1. Look at the property from a money-making perspective instead of through the lens of emotions.
This may be easier to do with an investment property than with your dream house. Be honest with yourself about the location, market, maintenance demands, your long-term plans and the level of risk you are willing to take.
For example, if you plan on holding onto a property for a long time, mortgage interest rate may be more important than purchase price. On the other hand, if you plan on “fixing and flipping” a property to sell quickly, a cheap price may be more important than your interest rate. Understanding your future goals will help shape your present values.
Talk to a financial adviser to help you outline a realistic cost-benefit analysis. Create a business plan. Partner up with a trusted real-estate agent who has sold a lot of investment properties to find the smartest deals; don’t try to do it all on your own, especially if you’re just starting out.
2. Make sure the price is right.
Do plenty of research on the property, loan options, the neighborhood and the rental market in your area. Be certain your monthly expenses are below the average cost of rent for a comparable properties in the area, and stash plenty of that cash flow into a separate account to handle maintenance an unexpected expenses. When it comes to tenants, prepare for the worst, but aim for the best.
Securing the right price is perhaps even more important for an investment than a main residence, because you want to be able to make money off it.
If you are looking for cash flow concentrate on properties that yield you 1 percent of the sales price per month — at the bare minimum. If you buy a home for $100,000, make sure you can at least rent it for $1,000 a month.
3. Make sure the property is right.
Consider the area’s demand. A college town may have different needs than sleepy suburbia. It will likely also have different demands on the landlord.
Avoid properties with high-maintenance features, such as swimming pools and elaborate landscaping. Condos with HOAs that handle the exterior can ease some of the burden for the landlord.
4. Make sure your renters are right.
Hire a property management company to help with renting, or at the very least provide tenant screening. Ask the property manager to run potential applicants through a variety of background checks, call all references and even cross-check them online. Taking extra time on the front end to find the right renter will save you time, money and stress in the long run — and protect your investment.
PRO Tip: Make sure you are aware of National as well as state laws regarding fair housing, before your begin screening tenants.
5. Be creative.
Could your rent out a room or basement in your current house to save for a downpayment on an investment property? Could you get a private loan or work with an individual investor instead of a big bank to get a better deal?
Think about real-estate investing as a business, and treat it with the same savvy, creativity and level-headed professionalism that you bring to the office.