Real estate is one of the most preferred routes to growing your wealth. That’s perhaps the most common dictum out there that you have heard. There is no doubt that it has brought wealth to many and the real estate route has made some of the world’s wealthiest people. Done well, there is no better route than to get your cash into real-estate. But, as with any investment, there are risks and the downsides could be disastrous in real-estate if you have not thought them through and have not mapped your risk and rewards properly.
There are multiple factors to consider. One is that you should be well versed with the nuances. These include things like terms of financing if you are considering leveraging your way into rental property investments. Then there are local market conditions. Where would rental properties be doing good? Obviously not in areas that are prone to crime! This, therefore, does involve you doing a lot of due diligence before you even venture out with your investment decisions. Last, but perhaps most over-looked is the sort of tenancy that you obtain. Getting a good tenant, one that you can vet for solvency, as well as other background checks, is equally important.
Are you made for it?
With the knowledge of your past investments and maybe even a few disappointments along the way, you will know that all investments are not made for everyone. For example, a risk-averse individual or an individual due to retire soon would not park investments in equities. Similarly, with real-estate too. You need a mindset for it. For example, most successful investors in the rental property arena say that new entrants should be ready to handle repairs and maintenance by themselves. This they say is because if you get to hire an outside agency, that would cost you a major chunk of your revenues. That affects your absolute returns. But, on the other hand, professionals also note that once you are into it and have been able to grow into multiple properties, you could perhaps employ a few professionals to do the leg work for you. At that point, it is convenient because your costs are spread across a larger revenue basket.
What property to invest in?
Say, you have been able to zero in on a nice location, what are the other factors that you need to consider? Are there good schools in the district? Are there super-stores and other convenience factors that families would look forward to in the locality? Are public conveniences easily accessible?
It is always safe to start small. Experts advise that your initial target should be properties that are priced downwards of $150,000. The higher priced a property is, generally higher are the maintenance costs. Coming to which, you should also be concerned about calculating your operating expenses for the property vis-a-vis the rentals that you are likely to earn. Operating expenses can range anywhere between 30 to 60 percent of your rental incomes.
If you need leverage, know that mortgages on rental income properties are much higher than the interest you would pay on an owner-occupied property. The down payments are also larger. While an owner-occupied home needs a down payment of around 3 percent, for rental income properties, financiers expect a down payment of around 20 percent. Also, returns on rental properties are between 6 to 10 percent. A fair expectation for the initial years would be around 6 percent only. Be realistic and compare other avenues of investment for their returns. For example, equity could give you returns of around 7 to 8 percent. There is no doubt though that a rental property income is a good source of passive income and you have additional tax benefits that you could generate from your investments.
Avoid risks and work with experienced partners
The biggest pain is dealing with tenants. This is where good property managers are invaluable. Some agencies have an online rental application facility, which you can conveniently use to list your property, invite applications, and they handle the rest. This includes receiving the applications, vetting them against known databases like TransUnion credit scores, criminal background checks from public records and court proceedings, as well as check nationwide tenant eviction records. This, in turn, implies that you as an owner can be at peace, knowing well that a vetted tenant is less than likely to give you any headaches and leave you free to concentrate on your operations.
RentSpree CEO and co-founder. Experienced real estate agent specialized in leasing and tenant screening.