Everyone seems to know it. It’s on TV, it’s in the newspapers, and it’s on the radio: Real estate investing can do wonders for your financial future! However, just because investing in real estate has a great reputation for delivering stellar returns and building great wealth doesn’t mean that all investments are created equal.
The secret to getting those great returns lies in understanding the fundamentals of what makes a great real estate investment and focusing on buying only the best real estate. This post will help you sort through the clutter by offering ten important considerations to think about before you buy your first investment property.
Investing in real estate is not for everyone. While you don’t need to be listed on the “Forbes Richest” list to buy a rental property, it’s still important that you have a firm grasp on your personal finances before investing in real estate. Real estate investing is not a “get rich quick” scheme, but an adventure that can span decades.
Only you can know if you are ready to start investing, so take a good inventory of your life, and if real estate can fit into your investment portfolio – great! Take time to get educated. Read real estate books, blogs, websites, and forums to get a firm grip on just what real estate investing is and how the most successful investors use real estate to build wealth.
Perhaps the biggest reason many investors lose money – whether in stocks, mutual funds, real estate, or business – is due to lack of planning. You wouldn’t consider driving from Saskatchewan to Peru knowing only that the direction was “somewhere south.” A plan will help you get from where you are right now to the place you want to someday be.
Real estate investing is an exciting field because of the many different niches and strategies you can use to customize your plan to fit your personality and position in life.
Perhaps you enjoy risk and would prefer a “fix and flip” business? Or maybe you are looking at long-term stability and would prefer investing in single-family rentals. Or, maybe you don’t want any involvement at all and would rather just “become the bank” by lending money to other investors and earning a passive return. There are hundreds of ways to invest in real estate, so find the strategy that best fits your lifestyle.
Here are some tips from FoxNews.com about what kind of property you should buy:
Watch this short educational video to get some additional real estate investing tips:
You’ve surely heard the old cliché: “Location, location, location.” The importance of this phrase is no less vital when choosing a real estate investment. You don’t need to necessarily buy a house in the most expensive area of town, but it’s important that you understand what the location is like.
Pro tip: Drive by your prospective property at different times of the day, on different weekdays, to ensure you are comfortable with the location and that it fits within your plan.
One of the most costly expenses you are likely to face as a real estate investor is vacancy. However, vacancy is a normal part of an investor’s life and should be fully expected and prepared for.
Check with local property management companies to determine the average vacancy rate in the area where you are looking to buy. Set aside money each month for times when the unit is vacant so you won’t be surprised by the lack of income. Also seek to minimize vacancies by understanding what the local average market rent is and attempting to be just a little bit below average.
A common mistake by many first-time real estate investors is underestimating their expenses. Sure, most investors know there will be repairs from time to time, but there are numerous other expenses you may need to account for. These include:
A good rule of thumb to use when determining how much you should plan on spending for expenses is known as the “50% rule.” The 50% rule states that, on average over time, expenses on a property will equal 50 percent of the income. So if a property rents for $2,000 per month, you can assume $1000 in expenses per month before paying the mortgage payment.
There are many different ways you can pay for an investment property. If you have the money, you can pay all cash and not deal with banks or loans.
However, if you don’t have all the cash needed or you’d rather utilize greater leverage, you can supply just the down payment and take out a mortgage to cover the remaining cost. If you do use a loan, be aware of the term and interest rate on the loan you are taking, and stay away from adjustable rate mortgages as they may go up, causing your payment to rise dramatically.
Whether or not you should manage your property is a personal decision largely dependent upon your plan, personality, skills, and availability. A typical property manager may cost between 7 and 10 percent of the monthly rent, but a good property manager should also decrease vacancy and have systems in place to make repairs less expensive. If you are undecided, always budget in management; if you decide you don’t like it, you’ve already planned for it.
Of all the great benefits real estate investing has going for it, easy paperwork is not one of them. Are you confident in your abilities to do the bookkeeping, or do you need to budget for a professional to keep track of the numbers?
Finally, always start with the end in mind. This circles back to our discussion on “having a plan.” Know what you are going to do with the property before you buy it. Many investors, during the last housing boom, bought properties with only one plan – to sell soon for a higher price. When the market dropped, however, many of those investors lost their properties.
Always have multiple plans for your investment, and know exactly how you plan on making money with the investment. Will you pay it off slowly over 30 years? Will you rent it out each month for cash flow and sell it when the market peaks? Know what exit strategies are available for you, and plan, from the start, how you will exit.
This guest post was written by Brandon Turner. He is the senior editor for BiggerPockets.com, the real estate investing social network and home to the free Ultimate Beginner’s Guide to Real Estate Investing. Brandon enjoys writing epically long, comprehensive posts on topics like landlording, tenant screening, and everything to do with real estate.
WHEN LOOKING TO BUY A HOME
One very important subject that is seriously overlooked is the health, safety and operation costs for the homes air conditioning and heating system.
Many people make the mistake by hiring a home inspector who for most of the time just turns the systems fan on and presents it as operational.
This tells you nothing…………….except that the fan works
1st Ask for previous electric bills for the Home in question: Cooling season ( late May- early mid Sept) Also, electric and/or gas bills during Heating season ( Sept- Feb ).This will give you a good indication on what your bills may look like………
” I have personal seen electric bills from $ 250 to over $ 600.00 a month”
Imagine having that added to your mortgage…..
2nd have your air conditioning and heating system inspected by a professional.” Not your standard air conditioning and heating company, but a Home Energy Rater”The H.E.R.S RATER Checks for Duct leakage into unconditioned space. This will tell you how much your system is leaking in percentages.
They also checks if your system is generating the proper amount of CFMs (systems are to give you X amount of Cubic Feet of air per Minute by building design)
Example: you buy a home that is 2000 sf with a 5Ton ac system but your air conditioning system is actually only producing 3.5 Tons of air….Inadequate for your home costing you comfort and dollars………..
The H.E.R.S RATER also checks the charge of your air conditioning system” There are way to many HVAC contractor who do not know how to use subcooling and super heat ( Proper charging methods)
Here is an analogy: You are purchasing a car and the dealer says you will get 30 mile per gallon….So you buy the car but you only get 10 mile per gallon.
H.E.RS RATERS check fan and watt draw and amp draw, cleanliness of system
and much more
” ALL OF THE ABOVE IF NOT CHECKED YOU ARE PAYING FOR THE LIFE OF THAT SYSTEM” …….FOOD FOR THOUGHT
For more information or to set up an appointment please give us a call at:
818-741-5856 / 661-547-4226
MMC H.E.R.S TESTING
36200 CASTAIC CA, 91384
Calcerts certified CC2005738
NCI Certified : 12-484-04
I have purchased a townhome in a new community. This would be a second home but I haven’t decided yet if I want to live there for a year (so that I can get a regular loan as it would be my primary residence and rent out my current home of 12 yrs) or just declare it as a investment property for renting and pay the higher interest.
I am told by the builder’s finance company that I would have to make that decision at closing (which would be in a month or so). I currently work as a consultant for a Fortune 500 company (been there for 14 yrs). I just found out a couple of days ago they are having some reorganization and want me to become an employee (I don’t know the specifics yet but I would probably make the same money as what I was making as a consultant). I don’t think this should affect the loan process but just in case it does and I cannot get a loan, I am being told that if I declare this as an investment property, I am going to have to come up with the money to buy it regardless of whether I get the loan or not
Is that correct?
Selling a home is never an easy task, and during challenging economic times the task is made even more difficult. However, for many home owners who find it necessary to sell their house in a down or “bad” market, every idea, tool and technique is taken into consideration to get the job done.
If are a home owner considering selling, the following is a guide that outlines steps you can take to sell your house fast – even in a down market. Take a look at the following 5 steps designed to make your house-selling task easier:
1. Prepare your home to be put on display and to make yourself scarce during showings. A clean and uncluttered house allows your prospective buyers to mentally put themselves in the home and decide on their own living arrangements without input from the home seller and certainly without bumping into family members or household pets while they are in the home.
2. It is very important that you make minor repairs or replacements where necessary. The last thing you want is for a prospective buyer to notice minor paint issues, cracks or other cosmetic issues and use those to look harder for additional problems s/he suspects may exist. Always keep in mind that selling your home in a down or bad market means you’re competing against many other “motivated” home sellers, foreclosure, short sales (both often sold at well below market prices) and bank-owned properties priced for fast sale. It is simply not enough to just show your house to prospective buyers. You have to go the extra distance to make your house the bargain they are looking for and will accept.
3. Come to terms with the right price early in the process. Pricing the house right is among the most difficult steps for most home sellers to take, but it is something that you MUST do in the beginning so that during the first 30 days on the market, when buyer activity is traditionally at the highest, you give yourself the best chance of getting your buyer then. The alternative is pricing too high and allowing the market to “reject” your house, after which the going gets a little tougher and you’re forced to reduce the price (maybe a couple of times). Pricing the house right can be accomplished by getting a “comp report” done by your neighborhood real estate broker or paying for an independent appraisal. Then you list your house at or a little below the estimated value set forth in the comp/appraisal report.
4. List your house with a neighborhood-based real estate broker. Selling houses is the business of real estate brokers. That’s what they do every day, and many are very good at their profession, and have the tools to get the job done. Having said that, you can always provide real estate brokers with information about your “for sale by owner” (FSBO) house without locking yourself into an exclusive right to sell agreement, if you so desire.
5. Be your own best promoter. Whether you hire a real estate agent or not, you can do a lot to help speed the home-selling process by spreading the word about the house you have “for sale”. Your own promotional efforts might include online posting (forsalebyowner.com, facebook, Twitter, etc.), local organization postings (YMCA, religious organizations, civic orgs.), local periodicals like Pennysaver, For Sale by Owner magazine, etc.
Regarding the video on the 50% Rule, there’s one problem that I can’t seem to reconcile. The math in the video implies a cap rate (gross rental income divided by property value) of over 15%. So, either the numbers don’t reflect reality or there’s an implied recommendation to pursue distressed properties. Can anyone comment? Thanks.
I know you asked this over 4 months ago, but I thought I’d respond anyways. Cap rate is actually Net Operating Income (NOI) divided by the value of the home. NOI is after all fixed and variable expenses. Therefore:
$264 multiplied by 12 months yields an NOI of $3,168/year. $3,168 divided by the value of the home ($125,000) gets us a cap rate of 2.5%.
Hope that helps Jim!
Great article! It is very important to conduct your research and formulate a plan before making any investment in real estate. Preparation and planning are key to achieving your investment goals through real estate!
A great article. The best advise for a newcomer is to buy new or a new property. Why get into the hassle of fixing up a derelict house. It’s no fun dealing with tradies.
This blog post from the very beginning is very much self explanatory in nature with cross question answering. I have gained a lot about real estate, how when and where to invest. The video inserted in the post were worth watching. On the hot debate line say every one have his perception on how and where to channelize his or her money.
Great article! Brandon makes great points. The only thing I would add is to make sure you understand how to run numbers on investment properties. If you aren’t quick on running numbers before you see a property, you could easily get duped. Versus if you have a formula you run the same for all properties, that is the best way to a) be more secure with what you are buying and b) be quick to the draw if need be in order to snag the property before someone else gets it!
I am a first time property investor and I’m currently looking to buy an expensive property, in which case if I were to buy the property, it would take up most if not all my availability of loan amount in the future.
the thing is this property is built next to a very expensive area in a very good location, very centralized, very accessible, with plenty of offices of huge companies around it, and am expecting it to be the next hot location.
my dilemma is, if I were to buy up this property, I am quite certain that I am not able to take up another loan for other properties in the future.
should I take this bet (or maybe opportunity, because it is built beside a booming area, which may actually in the future make it a hot location as well) or save my pool of money for a few cheaper properties?
I am a 26 year old post grad with perfect credit. I just recently landed a great job as a scientific business developer. I am thinking about my future and wish to buy a 2 family home in the next 2 years (gives me time to save up cash) for investment. I essentially want to become a “serial home investor”. My question is, for an FHA loan could I still put down 15-20%? I have been told you don’t need to put down that much for an FHA, however I just want to be comfortable paying mortgage, property taxes, and insurance expenses while living in one of the units.
this is a bit late, but the answer is yes you can put down more if you’d prefer. however a conventional loan may be a better option with that amount down due to the PMI.
Have questions, what would you consider a good interest rate, for someone who has clear their credit and have average credit for investment property they already found, they have already been pre-approved with down payment assistant included in the loan?. Again what would be consider a good interest rate for first time investment on a property on a fix loan?.
If someone works part time and get their retirement Social Security, and they purchase investment property or property, can that property be given to the purchaser as a gift?
If the purchaser is an senior citizen, do they get any discount on their first purchase?
Hi Patsy, the general rule is that on investment properties you typically pay a premium on the interest rate compared to a primary residence.
The typical rate increase is about 0.5% to the rate.
When purchasing investment or buying property, when it come to the loans is there some kind of incentive for investment property versus property you buy for yourself?
How do you contact Property Management Companies, for a certain area to check vacancies update
What are the major things we look at when purchasing investment property as far as inside the property?, I feel I know the answers, just want confirmation.
A lot of good information, thanks for the post. My advice is to work with a property management company. They can make your life so much easier.
How can they make your life easier?
collecting the rent, paying the mortgage, fielding calls 24/7, knowing what repairs need to be made and ethical well priced contractors to make the repairs, marketing to new tenants, understanding the prevailing rental rates and how your property rates, etc.
To add to Jeff’s post, property management companies are also a great way to protect your investment legally. They are well versed in all landlord tenant laws which I have found through the years many first time investors are not!
The article gives me the basic questions in buying real estate property and I am very glad to find this article. Keep it up.
Thank you for the valuable insight!
I am thinking to purchase a small home as an investment property. My plan is to rent it for long term cash flow. I was wondering if you can offer any further insight on the first topic “are you ready to invest”. For ex. hypothetically speaking, say a person with less than 50K of reserves with a current primary mortgage. Would it be wise to invest in a small 80K home with maybe 10K of rennovations by taking out a 2nd mortgage? What are the major factors to consider in this scenario or any recommendations?