With mortgage rates at historic lows and favorable home prices, the housing market has seen a boom in investment property purchases over the last few years. According to the National Association of Realtors’ 2013 Investment and Vacation Home Buyers Survey, investment-home purchases accounted for 24 percent of all sales in 2012 and approximately 16 percent in 2013.
Real estate can be a lucrative investment if planned and purchased properly. If you have been entertaining the idea of getting into real estate investing, here are a few things to consider before diving into the process.
Location, Location, Location
Where are you looking to buy? A great location will help ensure better rental rates, less vacancy, and a trustworthy tenant. Just as with a primary home purchase, location is one of the top factors affecting home and rental value.
Consider whether the home is near a good school district and if shopping, businesses, and other amenities are nearby. Is the crime rate low? What is the going rate for other rental properties in the area? What has the property value trend been over the past few years?
Investment properties have a number of visible of costs, and some hidden. Consider your amount of monthly cash flow and how those costs might affect it. Some experts recommend putting aside 25% of monthly income rent for these expenses. You will have the typical recurring expenses that primary homeowners pay, such as property taxes, insurance, etc. As a landlord/investor, you will also be responsible for:
- Maintenance. It is wise to determine an amount of capital that needs to be set aside each month for repairs and maintenance. Even if you don’t plan to use it monthly, at some point a water heater will need to be replaced or a roof will need to be repaired. Weigh the probability of higher cost maintenance when looking at a potential investment. How old is the AC, roof, windows, etc.? When will they need to be replaced and at what cost?
- Tenant search. How are you going to find good tenants? Will you need to hire a real estate agent to show the property or simply advertise availability other ways? Some landlords charge prospective tenants non-refundable application fees to be considered for the property and to offset costs.
- Vacancy. Even if you own property in a high-demand rental market, you should account for times where the house may go unrented.
Real Estate Valuation
Consulting with local real estate agents and appraisers can help you determine whether a potential property is worth the asking price and gauge if it fits with your investment plan. Consider what you feel you can rent the property for and how much cash flow will be left after paying the fixed expenses (mortgage, property taxes, insurance, etc.).
Some investors use the 1% Rule – if one month’s rent is near 1% of the home’s value, the property is a good deal. Others say an investment property should have rental income sufficient to pay for all expenses and pay off the mortgage in 15 years. Regardless, make sure you are purchasing a positive cash flow property.
Remember, real estate investing is not a get-rich-quick scheme. Planning for the long-term, being conservative and buying properties at good valuations will help make your investment venture successful. Looking for more information on purchasing an investment property?Our Investment Guide is a great go-to for advice on purchasing and financing rental property.
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