Raise your hand if you have seen—and not so secretly loved—a home improvement show?
(My hand is raised.)
Most of us have at least seen an episode of a smiling couple or family duo find a crumbling house or apartment, quickly restore and renovate it, and end up selling or renting it for a huge profit. This glamorous reveal may make some of us think:
I could do this myself.
This has led to many tough lessons learned the hard way that real estate investing is a business that requires skill, persistence, and determination to get right. Before you buy a hard hat and stick a for sale sign in the yard consider the points below to determine if real estate investing is right for you.
Know The Costs
As with all forms of investing, real estate investing comes with many costs. The first step in determining if you want to invest in real estate is adding up the costs and creating a sound budget starting with the sale of the property itself.
Most advisors recommend keeping the cost of your first rental property low relative to the area you live in. In NYC, it is hard to find anything of good value below the $350k mark. That money will go really quickly especially in a high-demand area. But this number is used as a benchmark so you don’t overwhelm yourself financially as there are many other costs that will accompany the property.
You will find that you need a bigger down payment on a rental property, usually a full 20% to 40%. With your primary residence, you may have been able to get qualified only putting a 5-10% down payment but the standards change for a rental property.
Once you find the right house you will need to qualify for a mortgage in order to actually purchase it. Keep in mind that mortgage lenders may charge you a higher interest rate when the property is used as an investment as opposed to your primary residence. This is a good thing to know so you can factor it into your overall house-buying budget.
When you own a home you also have to pay property taxes. For current homeowners that isn’t much of a surprise. But when the property is being used as an investment, your property taxes often increase by about 3% which can be a big surprise when the bill comes in. Getting these hard numbers will help you stay in budget and keep you financially afloat.
Odds are you aren’t buying a rental property fit to host a king or a queen so you may need to put some additional work into the unit to make it more desirable for renters. This could mean fixing the roof, updating the HVAC, cleaning the carpet, and changing the fixtures which could cost you thousands of dollars if you aren’t careful. Remember, only make the changes that will increase the value for renters. You don’t need to make unnecessary and costly cosmetic updates, just the ones that make the place clean and tasteful.
Just like in your own home, there comes a time when the roof starts to leak, the plumbing needs to be replaced, the fridge stops working and when you are the landlord you are responsible for fixing those things in your rental property. It is important to be aware of these costs before you go in. It would be good if you could fix most common issues yourself to help save you money and only contract out the work you know you can’t do yourself.
Location, Location, Location
In real estate, everyone says that it is all about location, and they are right. The location of your rental property will help determine the amount of money you will need to spend to get it and the amount you can expect to charge for rent.
If you are in a prime location close to the city you would be able to charge more than a place much farther away. Location is especially important to renters so you should look at your potential property’s proximity to transportation, grocery stores, shops, bars, restaurants, and other entertainment to highlight for your tenants. Your location will also help you stand out against others in the market.
When you are looking at properties it is really important to understand the market you are in and figure out the type of property you want to invest in:
There are so many options for real estate investing and it comes down to your goals for the property and the type of tenants you want to attract.
Your Renters Matter
If this is your first time investing in real estate, it is important that you remember your tenants become real people, not just numbers you have plugged into your budgets and spreadsheets. Finding the right people to rent your property is important because if you don’t you could end up with damaged property late or missing payments and other troubles.
For these reasons, it is highly important to have a lease agreement, run a credit and rental history, consider a background check, anything to help you assess how they will maintain your property.
Your renters are who ultimately help you bring in profit. Therefore it is important that you are a good landlord and keep up your properties well so that you retain your tenants for as long as possible. Because without the tenants, you are not making money. Although it is key to factor in some gap time between renters and have a contingency plan in place to keep your budget intact.
Assess Your Investment Goals
Your goals for your investment strategy are important. When you are thinking about adding a new element to your investment portfolio it is good to take the time to look at your financial goals and see how it will help you achieve them. Here are some questions that can help.
- How do you see real estate fitting into your portfolio?
- Will investing in real estate help you reach your financial goals?
- Why are you interested in real estate? Are you getting into it for the right reasons?
Here at Wealth Habits, we are all about helping you make the most of your money. I love working with people t reach and surpass their financial goals. If you are thinking you want to add real estate investing to your portfolio, give me a call and we can make a plan for you.