[Today we have ourselves an awesome guest post by Jennifer Riner, who does marketing for Zillow (the link is just in case you live under a rock and don’t know who they are :)). Anyway, I’m grateful that Jen took the time to write about this topic, because it’s definitely something I’m interested in. I hope you enjoy it as much as I do!]
All too often, hopeful real estate pioneers begin investing before they are fully prepared. Ill-equipped amateurs might find themselves in debt after financing properties and failing to come up with detailed business plans.
Consider these seven factors to reduce risk when investing in real estate.
Choose a time in life to invest wisely, based on both the rentals market and personal financial capabilities. Real estate investments don’t typically reap immediate monetary gains. Instead, investors put time and effort into selecting properties, performing renovations and finding responsible tenants to fill vacancies and subsequently profit in the future. It’s imperative investors have enough capital to fund these necessary expenditures before expecting returns on investments.
2. Property Type
With a knack for home improvement, do-it-yourself aficionados lean toward less expensive listings that require upgrades. Passive investors with full-time careers, on the other hand, prefer to purchase move-in-ready buildings to collect rent immediately. For some, managing one lease at a time in a single-family home is the most reasonable option. Select property size and condition based on current lifestyle, work demands and personal priorities.
3. Location Options
In any real estate deal, location is always the most important factor. Choose rental property locales based on the types of renters desired. For instance, suburban, school-oriented neighborhoods are good options for investors marketing to families. High-rise owners looking for a young, hip group of leaseholders should venture downtown.
4. Local Market
The U.S. rental market is competitive right now – giving investment proprietors an economical advantage. However, some smaller regions fare better than others. Again, use desired tenant demographics to determine if local markets are wise locations. Single-family property owners looking for long-term leaseholders may not care about how “hot” the market currently stands. Search comparable rentals online to foresee potential pricing and help budget for down payments.
5. Potential Expenses
Similarly to home purchases, acquiring rental properties costs more than initial down payments. Budget for post-closing expenses, such as utilities (water, sewer, garbage and electricity), legal fees, maintenance and improvement costs, vacancies and accounting. Some investors abide by the 50 percent rule, which states owners should budget half their rental income on property expenses. Don’t expect the full rental revenue to solely finance the mortgage.
Determining how to pay for property is an obvious, yet crucial step in becoming a rental owner. All-cash deals are advantageous for buyers because they avoid interest on loans. However, the probability of financing a multi-unit building outright is slim. Buyers should invest the largest possible down payments to limit monthly costs and stick with fixed-rate mortgages to avoid potential interest rate spikes in the future.
7. Property Management
Property owners don’t always manage their buildings first-hand. Decide whether it is necessary to hire landlords to deal with daily occurrences onsite such as property repairs, rent collection, property showings and lease signings. Owners should budget for employee salaries when devising initial business plans, as profitability is the ultimate goal.
Albeit basic, these initial steps are essential components toward successfully investing in real estate. Research and plan extensively to avoid the headaches associated with properties.