Are you looking for a way to diversify your investments or build a passive income source that helps you maintain your lifestyle during your retirement years? Real estate is one of the safest — and among the most potentially profitable — fields in which to invest. The real estate market tends to perform at least as well as the dollar, so inflation seldom reduces the value of a real estate investment. With good decision making, you can profit from a real estate investment regardless of the current state of the economy.
Although investing in real estate is one of the best ways to build wealth, there is no guarantee that you will profit from your investment. When you buy a property, you’ll compete with other investors and prospective homeowners who will drive the price up. If you choose the wrong property — or the wrong location — the value of your investment could actually decrease.
The good news is that most property values do tend to trend up over time. If you make a poor decision, it is unlikely that you will lose the full value of your investment. If you wait long enough — and improve the property as needed — you’ll likely come out on top in the end.
These tips can help you choose the right investment property.
Understand the Market
One of the best ways to get started with real estate investing is to buy a property in your own city. You know what the most desirable neighborhoods are. You drive by the homes every day and know which ones could be premium properties with a little work. If your goal is to buy properties, hold them and rent them out for residual income, starting small can help you determine whether you really have the time and energy to become a landlord. Renting property can be extremely profitable, but property maintenance, extra insurance and other expenses will eat away at your time and earnings.
Tip: Many cities have zoning laws that affect which properties are legal to use as rentals. Before buying a property that you intend to use for rental income, make sure that you can rent the property legally. Understand your housing market.
Anticipate Your Rental Expenses
If you plan to rent your property out, you have to buy the property at a price that allows you to set a reasonable amount as the monthly rent and still earn a profit. Maintenance and insurance aren’t the only expenses that will cut into your profits when you rent your property. Some of the other costs include:
- Hiring a manager if you’d prefer not to handle tenant relations yourself
- Lost income and legal expenses if a tenant stops making rent payments
- Paying the property mortgage out of your own pocket if you have difficulty finding tenants
- Cleaning the property and repairing damage when tenants move out
- Advertising the property when a tenant’s lease is nearly over
If you fail to account for all of the expenses when setting the monthly rent amount for the property, you may actually lose money. The good news is that, even if you do lose a little money while getting your bearings as a landlord, you’ll still be lowering the balance on your mortgage each month. Over time, the value of the property will exceed the amount that you owe. When you eventually sell the property, you’ll earn your losses back. You may even profit.
Identifying a Good Neighborhood for Investment
After you gain experience as a real estate investor, you’ll want to branch out from your home neighborhood and identify some other areas with investment potential. Use the Internet to help with your research. If you find an area that has a rising population and little room for new construction, for example, the area may soon experience a housing market boom when the demand for real estate exceeds the available supply. If you buy property before the market explodes, you can sell the property for a quick profit. If you choose to offer the property for rent instead of selling it, you can probably charge a higher monthly rate.
Before you buy a property in an area that seems poised for a market boom, try to identify what’s causing so many people to move there. If many new businesses are coming to the area, it’s a possible sign that the housing market will stay strong for a while. If the reason for the population growth appears temporary, you may want to look for a different area in which to purchase an investment property.
You should also look at the demographics of the people who live in the area. Are there plenty of people who can afford the rent that you want to charge, or is it an area with expensive homes and low salaries? You don’t want to hound your tenants over unpaid rent or go through the expense and hassle of eviction proceedings.
Tip: Look for an ideal area for investment based on real facts that you can prove. Don’t write an area off just because you wouldn’t want to live there yourself. If all of the facts suggest that you’ll profit from a real estate investment in a given area — and you can find the right property — you should strongly consider the investment.
Finding the Right Property for Investment
You’ve identified an area with low crime, plenty of employment opportunities, a good school system, high salaries and a growing population. If everything about the area seems right, it’s time to find an investment property.
Compare the Monthly Rent to the Total Investment Cost
How do you choose the right property to buy? The property’s price is the primary factor — not just the price that you’ll pay to buy it, but also how much it’ll cost to renovate or improve the property to make it ready to rent. Some experts believe that the price of the property and your improvements should not exceed 50 times the amount of rent that you plan to charge per month. If you want to charge a monthly rent of $2,000, for example, the total cost of the property should not exceed $100,000. Check out Westpac Banks property investment calculator.
In a great neighborhood, finding a home with a low purchase price isn’t going to be easy — so you’ll have to look for a deal. A home that’s in foreclosure or needs improvements may sell at a low price. If you want to buy a home that’s in foreclosure, factor in the cost of a real estate attorney to help you through the process. If you want to buy a home that needs improvements, remember that contractors can be expensive. If you can’t do any of the work yourself, hiring a contractor will greatly increase the total cost of buying the home.
A Condominium Can Be a Great First Investment
Are you having trouble finding a single-family home that fits your purchase criteria? Consider a condominium instead. In a condominium community, all of the owners pay monthly association fees to cover expenses such as building maintenance and landscaping, so upkeep of a condominium may be simpler for someone who’s new to investing in real estate.
The drawback of buying a condominium is that since the prices of the dwellings are typically lower than those of single-family homes, the rents are also lower. You’ll have to find a property that allows you to earn a profit after paying the mortgage, maintenance fee and all other expenses. Here’s some more thoughts on condos specifically.
Investing in real estate has its ups and downs. Finding the ideal property in the perfect neighborhood is difficult enough. If you rent the property, you’ll also have to deal with other expenses that eat into your profits. If you aren’t earning revenue from a property because you can’t find a tenant or your tenant isn’t making rent payments, you’ll need the available capital to continue paying the mortgage out of your pocket. Otherwise, you’ll risk losing the property. For this reason it is often advisable to hire a property manager. The best property managers will have a waiting list of tenants in your area, will manage any maintenance, inspections and all the admin so you can focus on your portfolio rather than the administrivia of property ownership.
Despite the pitfalls, real estate regularly creates new millionaires — and you could be the next one. Before you buy any property, research thoroughly to confirm that you’re buying a home in a real estate market that’s stable or growing. Analyze your financial situation thoroughly so you understand how much you’ll need to earn from the property each month to cover your mortgage, taxes, insurance, maintenance and other expenses. If you find a property with numbers that make sense for your situation, you’ve probably identified a solid investment that’s going to earn steady revenue for years to come.