Are you thinking about investing in a rental property? If you are then first you need to ask yourself, what is your overall goal for this investment? Once you know that, the process of buying a rental investment is simple and here are the top ten golden rules of property investment.
1. Buy a Property that Will Return Immediate Rental Profits
One rule of thumb is to buy sensibly, and there are no real secrets. If you buy a property that is too expensive, then even with perfect management it can often be hard to make a profit. When you buy you will never know what the state of the market is going to be when you finally sell. Therefore it’s not advisable to bet on an increase the price of the property. Instead you should focus on the immediate profitability from renting.
2. Define your Target Property
For those initially investing, they will typically have a lower investment capacity so the choice is often between a studio and or small apartment. Then you will need to decide on your target market, for example, students. As a result your property location should be selected depending on the target. So in the example of students, the environment of the property is crucial as well as the location – for example, near the college
Also know about the financial situation of your target renters. Using the student example again there will be are advantages and disadvantages in renting to them. Many student will have a rental payment guarantee from their parents which should give you peace of mind.
3. Do Your Research on the Location Area
Is the city or neighborhood attractive to renters? The factors that attract people are simple: work, schools and reputation. If there are many jobs, the city attracts people. If the area has a good reputation, it’s even better. University towns are also popular with students.
However, what if there are too many rental properties in the area? Currently many cities of medium size are overloaded with rental properties due to the negligence of developers and investors in the mid 2000s during the property boom.
Also try to check out the economic activity in progress. This might be difficult at the moment but it remains an important indicator for your choice. For example, try to avoid cities that depend only on a single large employer.
Then there is the immediate environment. Shops, schools and transportation are the three key points. The immediate amenities can help to determine the attractiveness of property to a tenant. They might be willing to concede something about the building or neighborhood if it is still close to everything they need.
4. Buy Close to Home
Always try to buy close to home. If you can buy a property in an area that is familiar then it will help you because firstly you will know the best neighborhoods to buy in. You can also intervene if problems arise at the property, because if you decide to manage the place yourself then it is preferable to be close.
5. Create Your Team
Your initial investment property will be a learning process. A real estate agent, a lawyer and accountant are three members of your team you must select carefully. Sometimes finding a good craftsman or handy man is also necessary for repairs and upkeep. Other people you might need to employ are architects, insurers, bankers and surveyors.
If you really want to progress with rental investments and build up a large property portfolio then you will occasionally have to create a team. You might even want to consider investing with a partner, if you do though, make sure that they fulfil the following criteria.
- Share your goals
- Have the same objectives
- Share the same values
6. Don’t Be Afraid to Trust Your Instincts
Always analyze the properties you could buy in a rational way. The best way is to write down a list of criteria which will help to guarantee that you will not fall in love with the first place you see. Analyze the good from all angles and if you find a problem then it is perhaps not a reason to cancel the purchase but instead could help you to negotiate the price accordingly.
Do remember though, that generally speaking, a tenant will be less demanding than a buyer so don’t dismiss a rental property purely based on your own personal preferences.
7. Make to Calculate Profitability
Calculate what your return on investment will be. Anything that comes in below 6% net income (after taxes) is questionable. It’s up to you to calculate the price that you can pay based on the rental income and performance that you want.
You should always consider two elements: the potential rent and future rent. The potential rent is the rent that you could get by simply make some changes to the property. The future rent is supposed to increase the based on the property, its environment and the target growth regulated by law.
Maintenance costs should not be underestimated. As the building becomes older, more expensive maintenance is bound to be needed.
8. Financing Your Investment
Getting the funding together can be long a long process and might mean you missing out on a property. It’s worth checking your borrowing capacity before making an offer just like you would have to when buying your own home.
9. Don’t Cut Costs on the Essentials
The professional investor does not hesitate to do the right thing despite the costs incurred. It’s good practice for rental properties to have the best insurance to protect yourself, or lawyer to study a difficult problem before buying. There are areas where you should not cut costs on before buying a property.
10. Find a Good Property Manager
Property management is a critical issue. If you have purchased your investment, bad management can ruin your purchase and your cash flow. Even if you do not plan to assign the property to a manager, you should still factor in these costs just in case you need to in the future.
This article was written and supplied by Sarah Humes from the Wall Street Subscriptions website. For up to date real estate advice, hints and tips she advises that you subscribe to the WSJ Weekend Edition which comes with an extensive property section. Click here for your WSJ Weekend Subscription Discount.