Looking to buy your first rental property? Stop. Here are a few things you should do before you start shopping.
Are You Ready To Become An Investor?
Are you ready to become an investor? Many people aren’t, but they’re attracted to the returns that real estate can provide.
Investing in real estate isn’t for everyone and it is definitely not an easy road to building wealth or a get rich quick scheme. It takes patience as well as passion, drive, and determination to succeed. In many ways, it’s a duel investment: you have to be both investor and businessman with an eye for detail and the scent of opportunity when it presents itself to you.
A good grounding is to get a feel for what existing real estate investors have achieved and what pitfalls they have experienced. Learning by example is going to help build your confidence as an investor yourself so be prepared to study real estate books, blogs and websites as well as being proactive in asking questions on forums.
Do you have a financial plan that includes how you will buy in, maintain, and get out of your real estate investment? Most people fail because of a lack of planning, not because of a lack of money. In today’s economy, money supply has improved again after the financial crisis put a bit of a line in in the sand, but you will have to present a credible financial plan and display affordability in order to get the finance you need to fund your real estate ambitions.
If you fail to plan, you plan to fail, as the old business adage goes, and this is relevant to real estate investment. Have a set of goals and a clear plan that outlines how you are going to achieve them, which will help you with establishing a line of credit as well as knowing where you are headed.
Do You Know What Kind Of Property You Should Buy?
Now that you’ve made the decision to invest in real estate. Maybe you’ve even been looking at these homes for sale. Now what?
You need to figure out which types of properties you’d like to own. You will find that a lot of successful real estate investors tend to concentrate on a market that they have a good understanding of or target homes in an area where they know how rental prices perform, so that they can easily compare rental income figures and see whether their proposed investment ticks the boxes in terms of annual rental returns in relation to financing charges.
When you’re looking for a rental property to buy, make sure that you have a deep understanding about what tenants in the area are looking for. Keep an eye on rental properties in the area. Which listings are renting quickly? Which ones are sitting vacant for extended periods of time? Knowing what tenants want before you buy will give you a huge leg up down the road. If you’re planning to use a property management firm to manage your property, you could definitely talk to them about ideal features before you start looking for homes. A good property management firm should know exactly what’s renting and what’s not, and be able to help you build a target list of features for your rental property.
What Is The Neighborhood Like Where You Want To Invest?
The location makes all the difference. You’ve heard this before. Everyone has, but it does matter.
You’re probably not going to be buying a home in the most expensive part of town as your first real estate investment, but you should be aiming to buy into a good neighborhood with low crime and moderate property values. If you’re looking at a family home (3+ bedrooms in the suburbs), schools will also be extremely important.
Do your research and check out the historical property values to see what the trend is regarding prices, as this will help you avoid overpaying and could also help to identify a property which offers growth potential as well as a good rental income.
What’s The Rental Income Potential?
Check local rental rates to see if the rental numbers work in relation to your finance payments. Again, a property management firm could be very useful to you here in projecting rental returns – especially if you are not familiar with the area. If you are planning to finance the purchase you should make sure and have your mortgage broker run numbers ahead of time so you know what your payment will be.
With that information you should be able to project out returns. When you do that, though, don’t forget to include things like maintenance, vacancy, marketing, management fees, and so on. A good property management firm could help you with this as well, or there are also some great resources online for landlords to help build out projections.
How Will You get Out?
Anytime you enter into an investment you should have an exit strategy in place – ideally multiple. Rental property is great in that it really doesn’t matter what the market does. Whether it goes up, or it bottoms out like it did in the last recession, if you did your due diligence ahead of time and made sure the numbers worked – you should be well equipped to whether the storm. Rental property is a long term investment, so for the most part you don’t need to get caught up in the ups and downs.
Typically your exit strategy with rental property would be to sell the home at some point in the future, or to pass it on to your children. Either way, you’ll want to make sure you at least spend a little time thinking that through and discussing your plan with your CPA and estate attorney. If you sell the property, you’ll want to understand the tax ramifications of that. If you’re plan is to pass it on to your children, you’ll want to make sure you put a structure in place to make that transition as easy as possible for them.