There are a lot of reasons to think when buying a property as an investment, as it has produced many of the wealthiest people on earth. But like every other investment out there, it is important to be well-versed before spending millions of dollars on it.
Purchasing your first rental property is a major investment and a lucrative one at that. However, some precautions have to be taken. You must take your time to research, read tips like you are currently doing. There are a lot of tips online that have been written by professionals and success stories in the real estate industry as regards purchasing your first rental property.
Here are Severn (7) important tips to consider before buying your first rental property:
Eliminate your debt before buying
You should avoid carrying debt as part of your investment portfolio. Although Savvy investors do, the average person should not, as it is not advisable. Buying a rental property may not be the right move for someone who is servicing a student loan, or has unpaid medical bills. Being cautious is extremely key.
Settle your debt before thinking of buying your first rental property. Don’t put yourself in a situation where you don’t have the funding to pay your debt. As you pay up your bills, in the meantime, you can read up on the successful real estate success stories and learn how they became successful.
Generally, investment properties need a whole larger down payment way more than owner-occupied properties, so prepare yourself for what is coming ahead. The approval process is much lengthier and a lot of cash is required. With turnkey properties, you do not need to spend too much time or effort before letting/renting them out however, they are usually not very cheap.
You will need as much as 20% as down payment, considering that mortgage insurance is not available for this type of rental property investment. For instance, if your down payment on your current home is 4% down, then that will not be enough for a rental property. You should prepare for about 20%.
As of 2020, the cost of borrowing money might be cheap, but the interest rate on an investment property will be higher than the regular interest rate on a mortgage. Don’t forget that you require a lower mortgage payment that won’t affect dig deep into your monthly profits.
Compute your margins
Big firms that purchase distressed properties aim for 5- 7% returns because they have to pay salaries of staff. As an Individual, you must set a major goal of about 10%. Place your maintenance costs at an estimate of 1% of the value of the property annually. Consider other costs such as insurance, property taxes, possible homeowners’ association fees, landscaping, and pest control as well as landlord insurance.
If you correctly compute your operating expenses, it will be between 35% and 80% of your entire operating income. If you decide to charge $2,000 for rent and your operating expenses come in at about $1,100 monthly, you’re at about 40% for O.E. Better still, you can use the 50% rule. If you charge $5,000 per month, expect to pay $2,500 in total operating expenses.
Determine your return
Ensure you compute correctly, your returns on every dollar that you invested. A 6% return as a landlord in your first year looks pretty good, especially considering that number should increase over time. For instance, stocks may offer a 7.5%, while bonds may pay 4.5% on cash-on-cash return.
Look for the right location
When deciding on the most profitable rental property, make sure you look for a location that has low property taxes, a good school district, and has a lot of amenities, like restaurants, malls, movie theaters, and parks nearby. It is also important to find a neighborhood with low rates of crime.
It is important to get advice from real estate experts. When you are in the middle of making a decision, your mortgage broker, real estate agent, even family and friends will have a lot to say. Discuss with your financial planner. A financial planner will look to consider your entire financial picture before making recommendations on the amount that is reasonable to spend on the first investment like Rental Property.
You might also consider having a business partner in some scenarios. The partner must however not be your family member. Partnering with families doesn’t always work. This is not to say there are no times when family members partner and create a successful business but many of the time, it simply doesn’t work. For me, it is always better to partner with a friend rather than with a family member. Whatever partner you choose will give you a different voice when it comes to making decisions. Adopt these seven important tips step by step and watch yourself become the next billionaire.