Real estate is both highly lucrative and risky. You need to be very familiar with the industry in order to earn the ROI you want from it. Before buying your first rental property, here's what you can do to minimize your risks.
Do Your Research.
Attend real estate seminars. Read investment books. Take classes to help you make informed decisions and better evaluate the rental market.
Also, research neighborhoods carefully. When it comes to properties, location is extremely important. For example, if the property is close to a school, chances are most of your tenants are students who have limited budgets. Likewise, if you happen to live in a neighborhood with a high crime rate, you have to take the necessary precautions to keep your property safe.
Consider Hiring a Property Manager.
As a landlord, you'll have to deal with a lot of time-consuming tasks. You need to advertise your rental, meet with prospects to host showings, collect rent, co-ordinate repair issues and the like.
If that sounds like too much work, consider hiring a property manager. Before you do so, ask yourself the following questions.
- Can you afford to hire a property manager? On average, managers charge between 5 to 10 percent of a property's monthly gross income.
- How much experience do you have in property management? Taking too long to fill a vacancy or hiring the wrong repairman can quickly eat into your potential income.
- How many units do you intend to own? The scope of your responsibilities will be directly proportional to the number of units you'll own.
- Will your rental property be close to home? The farther your rental is from you, the harder it'll be to manage.
- Will you have the time to manage your property? It's hard to manage your rental property and hold down a full-time job at the same time.
- What's your tolerance for dealing with complaints? If dealing with angry tenants isn't your forte, you're better off having someone else do it.
Get the Right Financing.
Unless you can afford to put down thousands of dollars from the start, the best way to purchase property is to secure a mortgage. Generally, mortgage interest rates hover at around 20 percent. You can also use other financing options, such as the following.
- Online lenders. Usually, online lenders offer better rates than traditional lenders. Examples of online loan marketplaces include Rocket Mortgage, Quicken Loans, LoanDepot and Lending Tree.
- Seller financing. Essentially, this involves you borrowing money from the person selling you the property. Both parties have to execute a promissory note which contains details on the rate of interest, repayment schedule, and remedies in case the buyer defaults.
- "Crowdfunding." Here, you can join a group of property investors. This way, whenever any member of the group invests in real estate, they can simply draw funds from the money pooled by the group.
Look For a Move-In Ready Home.
Of course, you want the move-in process to be as easy as possible. Look for a rental property that doesn't require major renovations or repairs. Some reasons why move-in ready homes are the best choice are:
- There's a huge capital tax gain on move-in ready properties. Also, there's no service tax involved.
- There is no waiting period. You only need to complete all the procedures needed to get your vacancies filled.
- What you see is what you get. Self-explanatory.
Lock in Equity at The Closing Table.
If possible, avoid purchasing property at retail market value. As much as possible, buy at a 10 to 20 percent discount from a property's current market value. You can estimate how much a property is worth using tools like Zillow's.
When investing in your first rental property, there are several factors you need to consider. By following these tips, you can become an investment property owner in no time.
Author Bio: This article was written by Stephen Fox. He runs Upkeep Media, a real estate marketing agency. When he isn't reading on the latest marketing trends he spends his time with his family and playing basketball.
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