It’s never been difficult investing in real estate, but it can still be challenging if you don’t know how to manage your real estate investment portfolio efficiently and effectively. Whether you’re purchasing your first investment property or expanding your portfolio, follow these steps when buying an investment property and you’ll soon see the returns add up.
Before you buy
The rental property market is hot right now, and with good reason. Income-generating properties can be excellent investments, but they’re not all created equal. What kind of property you buy will determine how much profit it can generate, and here are a few things to keep in mind: buy in a growing market; don’t overspend on renovations; choose your location wisely. Here’s more information on what to look for when investing in real estate.
In some cases, it makes sense to buy an investment property that’s in a location you don’t want to live in. In others, it can make more sense to buy a home that’s close by—or even one you already own—to save on costs. You should consider all of your options and choose what works best for your situation. That said, if you do plan on relocating (either temporarily or permanently), look at properties located within 30 minutes of work and school, or with access to public transportation—like light rail stations. Not only will these be cheaper properties than those farther away from jobs, but they may have more growth potential as well.
Proper maintenance and attention. Unattended homes or buildings that have been neglected over time are not going to give you a good return on your investment. In addition, if there’s something wrong with it, you’ll end up having to spend money on repairs and upkeep, which can eat into your profits. Furthermore, look at how well maintained a home isIs it up-to-date? Does it have proper windows? Doors? Appliances? Are they all in working order? If not, how much will it cost to replace them? A lot of investors will replace appliances and fixtures when they buy a property just so they know that everything works properly before renting out their unit.
One of the primary reasons you should buy real estate as an investment is because it’s a good way to create passive income. But, if you are planning on renting out your property—i.e., not living in it yourself—you want to be sure that there is enough demand in your area for people looking for housing like yours. Many small landlords overlook how much effort and research goes into finding tenants. You don’t need a crystal ball, but considering location and demand can help ensure future success.
Once you’ve found a property, your next big decision is who will manage it. There are numerous options when it comes to managing real estate and each option has different costs attached. For example, hiring someone from a property management company might be more expensive than managing it yourself. However, hiring a professional can often mean better management decisions—and peace of mind if you don’t have time or skill for self-management. But if you want to save money on fees, you can always go with self-management—but be prepared that even small mistakes (like not changing out your air filters every three months) could lead to big problems down the road, like lawsuits and eviction notices.
Cash flow projections
You don’t have to be an expert in accounting or real estate investing to make a decent decision about buying an investment property. Just follow three simple steps. First, calculate your take-home income from renting out the property (that is, what you will receive from rent). Second, project how much income you could expect over time if you were a landlord of that property—notably, account for maintenance costs and vacancy periods when calculating total returns. Third, compare your expected cash flow with how much money you need after taxes every year; if it doesn’t equal what you need and there are no other benefits of owning such as tax deductions or building equity, then it might not be worth it.
We’ve all heard it said before: Location, location, location. What many people don’t realize is that financing and mortgage loans are just as important in real estate investing. Before you buy a property, make sure you have your financing situation planned out. Do a little bit of research about your local market and make sure that there are no unusual requirements or other hurdles that might pop up later on when it comes time to close on your loan. For example, do any lenders in your area require home inspections? This may sound like a small thing now, but if they make you jump through hoops at closing when you were prepared ahead of time (and everything checked out), it could cause major problems—and potentially even delay closing.
The last thing you want is to end up with a run-down apartment that can’t be sold for top dollar. If you’re purchasing a distressed property, take into account how much it will cost to bring it back up to your standards. You should know from looking at comparable properties just how much it costs per square foot to renovate in your area. The Internet can give you a ballpark figure here as well as show you what kinds of houses have been sold recently. Be sure that maintenance costs—which may include insurance and taxes, among other things—are low enough or at least covered by rents so that operating expenses don’t eat into your profits.
After you buy
Although your initial research might give you a good idea of what you’re getting into, some things won’t be revealed until after you purchase. Investigate local laws and find out what impacts they will have on you. Tax rules can change yearly, so be sure to stay up-to-date with those. Work out how often repairs will need to be made and set aside money accordingly. Even if all of your plans don’t come together perfectly in real life, it’s important to go in prepared as much as possible. Make sure you know exactly how much time and money it will take before finalizing any deal; unfortunately, opportunity doesn’t usually come with a second chance.
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