Owning investment property and enjoying the extra financial benefits it provides is a standard practice for many in the U.S. Currently, there are an estimated 28.1 million American real estate investors. Having a little extra income from property investments is also something many aspire to and yet for whatever reason, are unable to follow through on. The responsibilities associated with owning and renting property aside from one’s own residence can be daunting. However, it can be done!
For anyone who has ever considered taking the plunge into the wide world of property investment, here are a few pointers:
Watch the Price
If you are able to buy a place for 12 times the amount of one year’s rent, then experienced investors say, “go for it.” In the wake of the mortgage crisis with its flood of distressed homes, thousands were able to do even better. However, that activity has slowed down a bit thanks to much smaller inventories of steal deal foreclosures.
Unless the property in question will be a future residence for you or possible vacation home, stick to the numbers. You can not live in two places at once and investing in a home for the purpose of renting it is a business venture, not a game show. That is, unless the numbers work in your favor, you will be at the losing end and responsible to pay up with real money! Also, do not let the presence of other interested parties spur you to making poor decisions.
Keep it Close
Avoid out of town temptations like that lake house an hour away or trendy little loft in a nearby city. Being in charge of a rental unit is extremely difficult when it is located outside of your usual travel area. Also, addressing problems, (and there are always problems) will cost more in time and fuel plus chip away at the profit margin. If you do decide to invest in a property located beyond your area, consider hiring a good property management company.
Familiarize Yourself with the Neighborhood
Randomly shopping for an investment property can be very tricky if you do not know the area inside and out. That adorable little condo with the very attractive price may be right in the path of a future highway or proposed rezoning effort. Noise levels, traffic problems, pollution, and crime are just a few of the other types of issues that can severely limit the kind of return you’ll need to make the project work. So, use every resource available to educate yourself about the neighborhood, talk with local realtors, review tax maps, surveys, and sites such as Zillow, Trulia, and Sperling’s Best Places.
Keep it Simple
More people than ever are looking for a simpler, more streamlined existence. A lot of Baby Boomers and retirees may be over yardwork and home maintenance. Younger prospects likely prefer to not be tied down by excessive maintenance. That’s why a one-bedroom condo is considered a safer bet than a traditional single family home.
From a landlord’s perspective, this choice also makes a lot of sense because the potential is still there, but with less of a financial obligation-both in the purchase and long-term cost of maintenance.
Have a Cash Cushion
Calculate how unforeseen emergencies, such as appliance breakdowns or structural problems will be handled. Next, factor in the possibility that the property fails to rent for a few months. Could you afford to keep this investment afloat in tough times? A good place to start is with a look at how much it takes to keep the property going for a minimum of 3 months. Be sure to consider utility bills, HOA dues and assessments-that would be the minimum amount of cash to have on hand.
Ask Yourself the Right Questions and Be Honest
The days of scoring an investment property for a song may be just about over. That is why it’s imperative to go into these commitments with your eyes wide open. Before taking on the responsibility of an investment property, consider these points:
- Pros and cons of serving as landlord vs. hiring a property manager
- How does your state address landlord/tenant rights and settle disputes?
- Who will handle the general maintenance and upkeep, such as painting, landscaping, emergency repairs, and appliance breakdowns?
- Can you afford to take on the extra financial obligations such a purchase entails?
- How is the local rental market in terms of inventory-flooded or slim?
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