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Are you thinking of trying your hand at real estate investing? If so, here are the main tenets every investor should keep close to heart when looking for and purchasing an income property.
1. Real estate investing may be a smart option, but it isn’t always an easy one.
Investing in income properties generates income, tax benefits, and equity as the unit appreciates through the years. Although profitable, being an investor can also take a lot of time managing and troubleshooting. Before investing, take some time to consider your personal commitments and schedule. Will you have the time to manage the real estate you now own? And if not, are you comfortable delegating management tasks to a property manager?
2. Don’t invest in rental properties until you can afford it.
You may have found an attractive and affordable deal, but consider ALL your short term and long term costs before you sign the contracts on an investment property. Start by thoroughly understanding your monthly budget, both in terms of personal expenses and in terms of holding costs for the investment. Next, use a mortgage calculator to break down your the monthly payments, insurance fees, and startup costs. Be sure to factor in a comfortable savings buffer for unexpected repairs. Lastly, don’t trust anyone who tries to get you a no-money down real estate deal! If top notch rental properties could truly be found with no cash down, everyone would be a millionaire already.
3. Good investing starts at home.
The first (and often the best) investment you will make is your primary residence. The tax-free profits derived from selling your principal residence are likely to bring you higher margins than the sale of an income property.
4. Don’t move into commercial investments until you’ve mastered the residential
As a general rule of thumb, residential property is easier to purchase, understand, and manage than commercial property. It also requires less cash to get into. Your experience as a homeowner will already have given you some experience in maintaining a residence. which will make it less complicated for you to spearhead a rental property.
5. Work with a team.
Before you start looking for a property, make sure you have a real estate agent, loan officer, tax advisor, and lawyer you can trust. The success of your real estate investment will depend highly on the quality of your resources and the knowledge your team brings to the table.
6. Among residential property options, small apartment buildings and duplexes are a safe bet.
In both small apartment buildings (a building with less than 5 units) and duplexes, you’ll benefit from passive income without a massive amount of management or risk. Unless you have the safety net of a strong team of investors, these are the smartest options for a debutant.
7. Scout your market for redeveloping areas.
Areas where development or redevelopment efforts are starting to spring up are promising for real estate investors. Rather than sticking to the over-saturated city core, look for areas that are close enough to the city centre but are still in the urban development stage (lower prices, higher appreciation!) Developing areas also tend to have stable structures that can be renovated quickly and cheaply for a profit.
8. Making a 20 to 25 percent down payment will give you the best financing terms.
The smaller your downpayment, the higher your interest rates, loan fees, and private mortgage insurance will be. Leverage (using a lender’s money to cover most of your acquisition costs) can help an investor get into the market, but too much leverage will chop away at your profits if the rental market turns or if your interest expenses are high.
9. Look for Location and Value.
Location is critical because you want to be sure that your rental property always remains occupied. In up and coming areas that are close to the city centre, apartments and condos will always be in demand by professionals and students alike. The further away you get, the bigger your investment unit will have to be (since you’ll be catering to a family demographic.) Picking investments close by to where you live is also a smart move, since you’ll know the area better and will be able to market the home more successfully. In terms of value, look for properties that promise high returns. Read this article on entrance strategies to learn how to identify good value in an investment. Properties that are in good locations and have easily and cheaply fixable aesthetic issues are generally considered to be good opportunities.
10. Don’t rely on the seller’s numbers when evaluating a property’s potential.
It’s always advised for investors to speak to the seller and request the history of the property’s income and expenses. But these shouldn’t be the only figures you go by. Very often, the reason that sellers are selling is because they’ve mismanaged their costs or miscalculated their profit potentials. Develop your own numbers by evaluating the property’s physical and fiscal characteristics with your broker or team of real estate specialists. Speak to a buying agent, and use an ROI calculator to plug in your own values.
11. Value an investment property based on projected Net Operating Income (NOI).
NOI should be projected for at least 3 years after the acquisition of an income property. Projecting the NOI is time consuming and requires a lot of experience, especially if you plan property changes to increase income and/or reduce expenses. But it needs to be done if you want to acquire a safe and profitable investment deal.