When the stock market gets soft, some people begin looking to invest in real estate. Having said that, not everyone is cut out for being a landlord, or for buying and selling homes as a commodity. If youre considering moving in this direction, take a little time to learn the ropes.
If youre a small investor plant to own whatever investment property you choose for at least 10 years. This helps insure potential appreciation that isnt wholly offset by ongoing maintenance and repairs. During that time the real estate market will have its ups and downs, but youll have plenty of opportunities to sell should you ever wish to. Additionally, knowing your time framework helps you determine how much you want to spend on the house initially and what the rent values should be in order to bring in supplemental income.
Overpaying for property is the worst proverbial sin in using real estate as an investment. Theres no perfect way to calculate what equates to overpaying. What you really need to be certain of is that all your costs for owning the property including potential repairs and vacancies is covered by the rent you plan to charge. Work with the numbers several ways before singing on the dotted line of a mortgage. If those rents get too high you wont have any renters!
Hint: get a house inspection. That will give you a good feel for repairs that need to be done NOW to get the property ready for renters, particularly fixing any code violations. Those costs are part of the financial overview for calculation purposes.
Note that when youre first buying a rental property its good to start small. Give yourself time to learn the ins and outs of securing rental property and uncovering good tenants. If you find success with that one property then you can consider more. At that juncture youll want to begin networking with agents, family, investor groups, etc. all of whom can help you land great properties at the best possible prices. Some investors try approaching owners of rentals and/or abandon properties to see if theyre interested in selling too. A motivated seller usually means better buying power. Another option still for good prices are foreclosure properties.
Warning: expanding your rental properties is very difficult if youre carrying a high interest to debt ratio or if your credit rating is iffy. Those factors mean either big down payments or very high rates of interest (that, in turn, raise your rent). Over-valued rent decreases the chance of full occupancy, and undermines the bottom line. When your debts or credit rating arent the best, you can consider land contracts or leasing for a while instead. That gives you time to restructure your finances.
From a financial management point of view, rental properties should not be your only form of investment. In general diversification is the key to having a balanced portfolio, let alone one that makes money for you. Find equities, bonds, etc. with comfortable risk levels and add them into the mix. This acts as a buffer for those times when the real estate market drops.