Investing isn’t just in stocks and bonds, in fact, real estate investing is one of the biggest sectors of investing there is. Now, it’s important to be aware of the fact that while there is certainly money to be made by investing in real estate, there is way more to it than simply buying the first “nice” house you see.
If you’ve ever watched HGTV and saw all the investment house flipping shows, it probably made you feel the urge to start investing in real estate yourself. The only thing about those shows is that they’re popular and entertaining to watch on TV but they depict a false reality of what real estate investing truly is.
On TV, you see the purchase of a home, possibly a home in need of a little TLC (but the cameras aren’t rolling during the purchasing process). The cameras turn on when the renovation process begins. Sure, they try to throw in some “hiccups” in the renovation timeline like zoning and compliance issues that cost the buyers more money… but it doesn’t get into great detail about those issues.
But have you noticed that, regardless of how expensive those issues are, the buyers always seem to have enough money to make the necessary renovations and still have money to stick to the plan? That’s not a reality of real, everyday people trying to get started in real estate investing. In fact, lots of real estate investors go into debt because of those very “hiccups.”
To be fair, the majority of the investors who’ve gone into debt from investing in real estate is solely because they went into it blindly. Investing, period, is something you want to be well-versed in before entering the industry, and especially in real estate. If you’re interested in owning a rental property, you need to look at these important considerations first.
Important Considerations to Think About Before Buying an Investment Property
How Much You Can Afford to Spend on a Rental Property
This is the first thing you need to think about before you even start looking at houses. Determining what you can afford first is going to help guide in your house selection process to only look at homes you can afford… You have to crunch the numbers first. Here are the factors you need to calculate:
Management of Property. You, of course, can manage your property yourself to cut back on costs, but this can cost you substantially in sweat equity. But, then again, you can hire a property management company to run everything for you. Whichever route you take, you’re going to have to factor in the fact that you’ll be a landlord and you’ll be paying for everything from maintenance and repairs to the property to finding tenants… The only difference is whether or not you want to do it yourself and take on the work or pay to have it done for you.
Financing. If you’re not paying with cash, that means you’re going to have to finance your rental property. You’ll want to consult with a trusted mortgage lender to determine how much money you can borrow and what your deposit would be. Also, based on the current market, you’ll also want to calculate a rough estimate of what you could expect as a realistic return on your investment.
Transaction Fees. Property taxes, interest fees, inspections, and legal fees are all transactional costs you’ll be responsible for, but can you afford them?
Condition of the House
There’s nothing wrong with buying a fixer-upper home but you have to look at what it will cost to bring the house up to code and in compliance with state and local regulations to determine the home as habitable.
The prices of real estate fluctuate depending on the market and the area, and to buy a fixer-upper in an area where the real estate market is already high isn’t a sound investment option to choose. But again, there’s nothing wrong with fixer-uppers… Simply get the property you’re interested in inspected and also call around to get estimates of costs to make the necessary repairs.
If the repairs eat up your budget with no room for standard and aesthetic improvements, you need to find a different property to invest in.
In all honesty, the key to success in real estate investing is investing in a property located in an area that people actually want to live in… it’s really that simple. The neighborhood needs to be attractive, close to area amenities like shopping and dining, and more importantly, it needs to be a safe neighborhood.
When it comes to crime and safety, robbers tend to avoid neighborhoods with watchful residents. Neighborhoods with a weak sense of community are largely the targets of criminals because they have a higher chance of getting away with the crimes they commit.
In this aspect, you have to think about the types of prospective residents you want to attract… Not only do you want good tenants but you want tenants that will treat your property well. You also want to feel assured that the neighborhood you chose won’t put your tenants or your property in harm’s way as well.
The attractive markets will cost you more but when you buy in a nice neighborhood, you’ll attract prospective tenants of the same caliber.