Buying an investment property comes with a lot of benefits. It is considered a passive income source; thus, there is no risk of asset loss, and it never dries up. Passive incomes provide investors with ongoing revenue and they appreciate in value over time.
Investing in real estate is an excellent retirement income source. It protects you against sequence risk and spreads your asset allocation. With an investment property, you are not required to sell any assets to get revenue.
While real estate investments offer great benefits, you will need skill and knowledge to purchase your first property. However, purchasing properties is a simple process, and anyone can learn how to invest in real estate properly and profitably.
Below are seven essential tips to follow when buying a real estate investment property properly.
1. Ensure You Do the Calculations Right
The biggest mistake first-timers make is getting the numbers wrong. Most people lose money due to miscalculating costs, rents, repairs, and other values. Below are essential costs you should look into before buying an investment property:
Carrying and Repair Costs
When buying a rental or a flip-and-fix property, you must know exactly how much money you need for renovations and repairs. It is better to overestimate the funds you will need than underestimate costs, risking that you might run out of money.
Remember that renovations may not go as smoothly as expected and you should think about taking a short term fix and flip loan to finish your project successfully. Working with contractors can be quite tricky and it is common for them to over-promise during a project and under-deliver.
If this is your first investment property, try to only focus on minor repairs. However, set aside some more money for any hiccups during the renovation. Conducting a pre-purchase building inspection will help you understand the extent of damage and the repairs needed.
It is very easy to overestimate the value of a property after repairs and renovations. To avoid this mistake, check real estate properties in your area and compare the prices of similar renovated properties.
You can also seek help from your real estate agent and a property investor in the area. They will give you an estimate of how much properties cost. This will help you limit your initial repair costs and save money where possible.
Continuing Rental expenses
Cash flow is not rent minus the mortgage payments. There are numerous non-mortgage fees that investors must pay. These expenses may average about 50% of the total rent. Some of these expenses include:
- Property insurance
- Vacancy rate
- Property maintenance expenses
- Property management costs
- Legal costs
- Capital expenditures and legal repairs
Before buying a property, ensure you are financially ready to take care of all the non-mortgage costs. Ensure you also correctly calculate how much each expense will cost and budget accordingly.
2. Consider Purchasing a Turnkey Property
If dealing with building permits, contractors, and mortgage repayments is a bit much, you should consider buying a turnkey property. Such properties are considered ready-to-rent or already have reliable, stable tenants.
To find turnkey properties, ask your real estate agent for pointers or check on online property sales platforms. Such platforms offer details about the historical and future estimated value trends of the property, and the local area data and statistics.
3. Be Patient and Avoid Emotional Investments
Purchasing property needs work, patience, and a lot of research. If you are looking for a good deal, the work you put in will multiply tenfold. The most common mistake first-time investors make is becoming emotionally invested in property too early.
Emotions should not be involved in any investment decisions. You may end up buying a property then realizing later that it requires too much renovation and repairs. Open your eyes and look at the numbers and potential profits.
A small number of people have the ability and patience to stay detached from all the properties they view. When looking to invest, remember to be realistic and avoid wasting your money and time on properties that you may like. Instead, go for the most practical property.
4. Bring Your Negotiation Skills
Most property sellers will give you a quote that’s a little higher, anticipating that you will negotiate. If you don’t, they start wondering if they quoted the price correctly.
To effectively negotiate, do some research on the seller and determine why they are selling the property. The more urgently they need to close the deal, the lower they can go. However, remember to quote the lowest offer possible that the seller will take seriously.
5. Organize Your Finances Before Submitting an Offer
Remember that sellers require details about your financing options after you make an offer on the house. It is advisable to organize for financing before you start making offers. While your lending options may differ depending on what you are looking for, there are numerous lending options in the market today.
6. Know Where to Invest Your Money
Contrary to popular beliefs, real estate properties don’t always increase in value. If you are expecting your investment to increase in value, then you’re gambling and not investing.
Remember that not all fix-and-flip properties will generate profits; thus, make an investment based on current property marketing prices. On the other hand, rental property investment is quite profitable.
Home values could collapse while rents continue to rise. According to the U.S Census Bureau, during the great recession, rents continued to increase while homes’ value dropped by 28%.
7. Understand the Risks
Any investment undertaking comes with risks. Thus, investing in property has its risks too. Ensure you explore all the risks involved to avoid making blind decisions.
Some of the common risks of investing in real estate include:
- The housing marketing economy may change
- The initial repair costs may be more than anticipated
- You may not get the rental interest you expected
- Property taxes may go up
- You may have unreliable tenants resulting in eviction costs and expensive repairs
While real estate investments are not 100% guaranteed, don’t just focus on what could go wrong. Understanding the risk will ensure you’re not blindsided if things don’t go as planned with your properties. It will also allow you to reorganize your finances for property profits.
Now You Know What to Consider Before Buying an Investment Property
Buying real estate could be one of the most profitable investments you will ever make. However, buying an investment property requires patience, discipline, and a lot of research. Use the above tips to guide you through the process.
For more property investment tips, check out other posts on our website. Visit the Real Estate section of the Everything Entrepreneur Blog to learn more about making plentiful profits off of properties.