The 101: Choosing Investment Properties
As we mentioned before one of the most important things to keep in mind when deciding on whether or not an investment property is good for you is the monthly expenses. If you cannot realistically charge enough in monthly rent to a potential tenant to cover your costs, there is no point in taking on the issues unless you have an ace up your sleeve. Another important thing to remember is the old adage, ‘Location, location location!’. This could be schools, shopping, or even something like crime rate. All of these factors will play a role in how quickly you can get tenants and how long they stay / how happy they are.
What’s going on in your area?
This may seem simple enough, but it isn’t always easy to find the right network of people to learn about what’s “in the know”. Learning as much as you can about the trends in the area is very important before investing in property. Remember this isn’t always going to something that you buy and sell in a month. This is an investment that not only you will grow with, but it will grow with the surrounding area. So take some time and find out as much as you can in order to make sure you and your new property will be happy “here”.
How Much Do You Need VS. How much can you borrow?
We wouldn’t recommend jumping in to trying to get yourself an investment property before you know exactly what price range you will fall in to. Contact a lending specialist right away to learn about potential loan options and what interest rates you will be able to obtain. Other you may find yourself wanting to look in to a bunch of properties that you just simply cannot afford at this time. This can really be a momentum killer, so we advise speaking with a lender right away to find out where you can begin (and focus) your search.
Avoid Rentals That Need Too Much Work
Some like to pride themselves in being an unofficial handyman who can accomplish even the most challenging of home improvement tasks, while others want absolutely nothing to do with it. It is important to realize that when beginning your journey in real estate investment this is a race, a long one at that. It is important, just like when running, to pace yourself and use every bit of energy ($) to best benefit your end goal. In this case, it is to get the money circulating, getting money moving in and out (mostly in, right?). So find a property that won’t require “core” work such as plumbing/pipes, electrical, or structural/foundation.
Who Will Be Living There?
Unless you’re planning on using the well-known “house hack” of living in the property for one year to obtain easier loan / interest rates (which is also a great way to learn what issues the property may have), it will be very important to envision what you’d consider the ideal tenant. Or better yet, what does the area or home consider the ideal tenant? If the surrounding area is low income and you sink a ton of money in to your rental property to make it look like it belongs in a kingdom, the money will not be coming back in to you pocket as it should, trust us. So allow you research and insight to help you judge who would be the perfect tenant and use this information to guide you in your house picking and renovating.
Expenses vs Earnings
Right along side choosing who will be living in your new investment property, it is important to understand what you can expect as far as earnings from the property. If the property you’re purchasing currently has tenants, be sure and ask the current owner for a history of payments so that you can look over and see how steady (or unsteady) it looks. If the property has been occupied by the previous owner, it would be a good idea to get an understanding of what is going on around the property. You can research and see what homes are selling for around the area, and even what some are renting for. Also, things like “Free Deposit” and “First Month Free” seem good in theory, but ultimately it represents a landlord / management company’s lack of ability finding or keeping tenants, this could be a big red flag for you and your investment ideals.
Also, don’t forget that it is safe to assume that more than 50% of your income generated by the property will be used for the property. If your loan is $900 a month and you are planning on renting the property for $2000 a month that would leave you with $1100/month. This amount would go towards vacancy (times when it isn’t being rented), utilities not covered by tenant, maintenance costs, property management costs (if applicable), taxes, insurance, and much more. Your investment may only bring in an additional $200/month when all is said and done, but this represent a huge success, and the steps of something much bigger.
Appreciation
At the end of the day, the property you decide to invest in need to bring you cash flow, money in your pocket. Otherwise what is the point, right? Appreciate is a very important thing to consider however, it shouldn’t be used to overshadow what makes money. Force appreciation is when you can upgrade a property and increase its value in the market, thus increasing your equity or financial gain from the property. Market appreciation is when the surrounding area is rises or falls in value and as a result, your property is affected. It is important to learn how these factors, over time, can play a role in your bottom line so take a little time to research more and more!
Return and Capitalization Rate(s)
Cash-on-Cash return rate refers to the percentage of your investment that you get back annually. So if you have $100,000 invested in to a property that makes you $10,000 annually, your cash-on-cash return rate is 10%. It is said that 10% is the baseline for what is considered “good” in the investment community, however there have been situations of cash-on-cash returns reaching as high as 25% or more. Don’t forget that just because you can get a high cash-on-cash return rate doesn’t mean the property is in the shape needed for renting. Make sure you consider all the facts before making a decision.
Now let’s say that you make about $5000 annually after paying all expenses from your investment property. Remember, this fake property cost you $100,000. This would mean that your Capitalization Rate (or cap rate) is 5% and it would take you roughly 20 years to get back the original $100,000 you’ve spent. Obviously increasing your cap rate means you get your money back as quickly as possible.
We hope that when you take all of these factors in to consideration you’ll be able to make educated decisions when selecting your next investment property. However, if you ever have questions or would like the guidance of a professional property management company Buckeye Northwest Realty is here to help. Contact us today to find out how we can help make your investment dreams come true!
