Investing in real estate can be a great investment if you are able to educate yourself about the process. Rental properties can generate ongoing passive income. Property prices tend to rise over the long-run, so you can also benefit from capital appreciation. You can also take advantage of certain tax benefits.
But just like with other investment type, it is important to do your research and understand the pros and cons. Before you go ahead and buy rental properties, here are some important things to keep in mind.
Do You Want To Be A Landlord?
While there are benefits to directly owning real estate as opposed to investing in a REIT (real estate investment trust), there are some disadvantages.
One of them is being a landlord and dealing with tenant issues. There will be maintenance emergencies, and you are also responsible for following legal guidelines.
When you own a single property, handling all the tasks on your own might be feasible. However, as you start adding more assets to your portfolio, you may not find the time or simply the energy to manage all your properties on your own.
You can hire experts such as Beverly Hills property management to help manage your properties. This should allow you to focus your attention on increasing your real estate cash flow and profits. These companies can also help you vet renters, to ensure that they will take care of the property and have the financial means to continue paying rent.
Finding the right location
When looking to buy a rental property, the key to success is “location, location, location.” You either want to purchase properties in areas that are already providing good cash flow, or due to future development, prices are anticipated to rise.
Look for areas with a growing population and areas that are being revitalized. Properties in this area represent the best potential investment opportunity.
Paying attention to a few key factors like locations with low property taxes, low crime rate, decent school surroundings, and standard amenities like parks, malls, restaurants, and movie theatres. Having easy access to public transportation and a growing job market will mean a larger pool of future renters.
To buy or not to buy
Once you have found the right property, the next step is to ensure you have the financing in place. One benefit of paying by cash is that it helps to generate positive monthly cash flow.
For instance, a rental property costing around $100,000, could generate $9,500 in annual earnings (after taxes, depreciation, and other costs). In this example, investing $100,000 in cash in the rental property can result in 9.5% annual returns on the $100,000 investment.
You can potentially earn higher returns by financing your property. If instead, you put down 20% on the property with a 4% mortgage, you can generate $5,580 annually (after the mortgage payment, taxes, depreciation and other costs).
The return on your $20,000 investment is 27.9% ($5,580 / $20,000 = 27.9%). This is much higher than the 9.5% you would earn if you didn’t finance. You can now take the remaining $80,000 and use it to purchase more properties.
The downside however is if you are unable to find renters, then you will be responsible for continuing to pay for the loans, taxes, and other maintenance costs. The key is to be able to understand the pros and cons, and be able to invest in a SMART Way!