Other folks do it and make a bundle. Why can’t I?
Buying real estate for investment is tricky. There are no guarantees that it will be successful as real estate values are cyclical, and you may not be jumping in at the low point. Being successful in making good real estate choices is key, and this requires thought and some expertise. Let’s talk about some of the things to think about before taking the plunge.
You can buy real estate for income and you can buy for appreciation, or both. Whichever you choose, some of the same pertinent factors apply. You’ll want a good location which means a safe neighborhood close to amenities, services and schools that prospective tenants or purchasers would like to live in. That’s number one. You’ll also want to choose a property that is in fairly good condition at preferably a below market price that can be improved with only cosmetic changes.
Let’s delve into the last. The more expertise you possess in maintaining and fixing things, the more suitable landlord you will be, and the higher return you can expect. If you’re not handy and have to pay professionals for any little things that go wrong (and there will always be something), you might consider buying art or stocks that don’t need tending.
Now let’s talk money. Purchase of investment property usually requires a larger down payment than a personal residence and interest rates on mortgages also tend to be higher. Real estate investment depends on leverage, the fact that you can make a small down payment and use the bank’s money to buy something you could not otherwise afford.
After you know you’ve got the down payment, it’s time to do your homework and thoroughly research your potential expenses. You’ll have mortgage, taxes, insurance, repairs and maintenance at the minimum. You also should figure in a vacancy allowance, as you will surely have months when the property is on the market, vacant and not generating income. To calculate your net income, take the rent you can reasonably expect, and then deduct your monthly expenses. The residue is your net income.
Let’s say the rent is $1,500 and expenses come to $1,000. You invest $60,000 in cash. To figure the return on your cash invested, take the $500 a month net income, multiply by 12, to arrive at a net annual income of $6,000. Divide that $6,000 by your cash, and you arrive at a return on investment of 10 percent. Given current returns on other investments, anything over about a 6 percent return would be a good investment, with 10 percent being considered excellent.
If you are buying real estate for appreciation, your plan is to resell the property at a profit. This may entail either having the opportunity to buy low for one reason or another, i.e. you have an inside deal or find a highly motivated seller, and you simply turn around and flip the property for its current market value. Another avenue is to make significant improvements to the property that increases its value, and offer the renovated property for a higher price.
Whichever path you choose, income or appreciation, information is your best friend in making a good choice and being successful. You are wise to look into neighborhoods that have been down, but have the potential to be gentrified, into not-so-great properties in great locations that can be improved, and in multiplex units where you can live in one and rent the rest. Real estate can be a great way to build wealth if you buy smart, are patient, and most of all, know just what you are doing. Good luck!
