Many millionaires it seem earn their wealth through real estate. While you may not have Donald Trump’s money, you can still get in on the action. If you only have a few thousand, but want to get into real estate, getting a mortgage is a touch out of reach. But you could invest in Real Estate Investment Trust (REIT). Those are pretty straightforward. So for this post, I’ll be focusing on buying your first real estate investment property. Let’s begin house hunting.
What is the first rule of real estate? Location, location, location! A house is not something you can move. Yes, there are ones you can but those make lousy investments. Although I do know someone who claims to make good money doing so. The problem though is that mobile homes lose value. Sure, you still collect rent money but real estate is about more than collecting a rent check.
As with most good investments, you need money coming at you from multiple directions. Yes, collecting rent money is good. But you also want the property to increase in value. Real estate is like having a stock with a dividend. The stock goes up over time and meanwhile you get dividends. It’s like having long-term income and short-term income. Beautiful, isn’t it?
Okay, so where was I? Yes. You want to buy in the right area. The right area attracts the right tenants. Do you have tenants with good jobs? Then perhaps buy near a hospital. Are you fine renting to college students, then find a house near campus. Also, your property value over the long-term needs to be considered. Is the neighborhood going up in value? Does it have reason to go up in value?
Let’s assume you want long-term tenants. These are great so the income from the property becomes as passive as possible. You’ll want to buy a house in a good school district. This will mean the tenants can stay even after they have children reach school-age. Make sure it’s a family friendly neighborhood. You want your tenants to feel comfortable. Make them never want to leave in search of greener pastures.
It’s also important to learn from those who’ve come before you. How much are rents commanding in the area? Make sure you know your numbers. How much can you earn per month from the property after expenses. The first rule of business is knowing your numbers.
It’s also smart to check if the property requires any special forms of insurance. Insurance such as flood insurance can be expensive. That can take away a huge chunk of your monthly profits.
Also consider how far this rental property is from your personal property. Unless it’s new construction, chances are you will be visiting the property fairly frequently. I had a colleague once who had a rental house. It was 45 minutes from his personal residence. It seemed he had to go over there at least a few times per week. This was because there were always little issues to fix or check on. The tenant may call because they think something is wrong with the hot water heater. Or the tenant may think a window is broken when it’s really just stuck. Make sure you’re not spending too much time on the road to address these issues.
If it’s not worth owning in cash, it’s not worth owning. This is something that resonates with me. A good real estate investor will tell you this. It’s so, so, so important. If buying the property outright doesn’t mean a better return than an index fund in the stock market, skip it. Why? Because a home’s property value will only likely increase by a few percentage points per year. That means the rent must earn the property at least another 5% to break even with the market. Then you must consider things such as repairs and your time. Try not to get too giddy about getting into real estate. Sometimes it’s better to just sit in an index fund and go on vacation.
Also consider that you are now even more tied down to where you live. With the world becoming more and more digital, more and more people want freedom. Buying another house will take you further from freedom. And, sure, you can get a property manager. But if you do that, then you need to reconfigure all your numbers. And honestly, I don’t see many people making good money whilst having a manger. I mean, yes, it can still be good money but as a rule, I’d want to steer clear.
The final thing to discuss is what the house should be like. Most importantly, you should get a home inspection. Go with someone who is trusted. Spending a few hundred pounds here will likely be a wise investment. If they see something that needs repaired, it could save you thousands.
When looking at the house for investment potential, look at things like parking as well. Make sure there is ample parking. People prefer not to park down the street. Make sure as well that the home is energy efficient. Neither you or your tenants will appreciate high bills. And also make sure the home is easy to maintain. Things like wood fireplaces and carpets throughout are usually a negative for a real estate investor.
Well that’s quite a lot of information in one blog post. The most important takeaway is to know your numbers. Make sure it pencils out. Make sure to also consider you may go some time without a tenant make sure you can carry that mortgage by yourself for some time.
Now good luck!
Will Lipovsky is a personal finance freelance writer and internet marketer. His most embarrassing moment has been saying to a Microsoft executive, “I’ll just Google it.” You can get in touch with Will at FirstQuarterFinance.com.