Investing in rental properties is a great starting point for real estate investors – they provide a consistent cash flow and generate value from appreciation. Not only that, investors also get tax incentives and deductions from owning real estate. While it can be a lucrative investment, experts say that you’ll still need to take some precautions.
With the real estate industry picking up pace around the world and with the sector entering the digital sphere, its success is no surprise. Courtesy the pandemic, virtual real estate viewings have created a storm among homebuyers and investors, who are now scrambling to get their hands on a good property. However, real estate is a tough business and the field is peppered with land mines that can obliterate your returns.
1. The Location
This is the most important thing to consider when you’re investing in real estate. You need to perform market research to work out whether you will get a good return on your investment. Choose an area which renters would like to live in. You will get a higher return by investing in a developing area. Consider things like transportation links, local schools, shops, restaurants, other businesses, other properties and of course, the gentry that inhabits the area.
2. The Condition of the Property
You need to think about how much upkeep your property will need. If you want to invest in a property that needs renovating, you need to take into account the amount of time and money a renovation will take. In the long term, you may be able to charge a higher rent which will be a better investment.
3. Population Growth
You want to invest in areas where people are moving in, not out. You can ask your real estate agent about where they are seeing the most shopping activity, the most demand for homes, and other growth-related factors.
4. Invest in Single Family Homes First
Invest in single-family homes first since it’s the simplest way to get started as a new real estate investor. The upkeep is easier than multifamily or commercial properties. With only a single tenant, there doesn’t tend to be as much wear and tear on the property and, when something breaks, you’ll only need to fix one thing.
5. Factor in Unexpected Costs
It’s not just maintenance and upkeep costs that will eat into your rental income. There’s always the potential for an emergency to crop up—roof damage from a storm for instance, or burst pipes that destroy a kitchen floor. Plan to set aside 20% to 30% of your rental income for these types of costs so you have a fund to pay for timely repairs.
6. Know Your Legal Obligations
Rental owners need to be familiar with the landlord-tenant laws in their state and locale. It’s important to understand, for example, your tenants’ rights and your obligations regarding security deposits, lease requirements, eviction rules, fair housing, and more in order to avoid legal hassles.
7. Choose a Tenant
Once you’ve closed a property deal, you need to focus on picking your tenant. Screening tenants can mean the difference between a quality renter that maintains the property and pays on time or one who’s late each month, stops paying altogether, or trashes the property on the way out. Make sure your screening process is consistent for every tenant. Note down the questions you need to ask, so that you don’t miss out on crucial points.
It takes a lot of footwork and research to line up all the elements. Today, with technology having levelled the field, a lot of investors going in for virtual real estate tours, it has become easier to look at properties and choose the one that best suits their needs and budget. When you end up finding your ideal rental property, keep your expectations realistic, and make sure your own finances are healthy enough that you can wait for the property to start generating cash.