Looking for a long-term, stable income generator with a large return on your investment? With home affordability at record highs, a booming rental market, and appreciating home values, investing in residential real estate could be a great opportunity for you to earn extra revenue and expand your mortgage goals.
According to a 2014 Gallup survey, Americans found real estate to be a better long-term investment than gold, stocks/mutual funds, savings accounts, and bonds. With financial incentives ranging from appreciation and leverage to tax write-offs and monthly rental income, it’s a wonder that everyone isn’t diving into the residential rental market.
Real estate investment can be extremely lucrative, but also comes with significant risk. Here are a few things to consider when deciding to purchase an investment property or rent out a currently owned home.
Knowing Your Market
In order to be an effective (and profitable) investor, you should have knowledge of the market you wish to purchase in. The more you know about what the renting community desires in the area, the better property purchases you will make.
Conduct some research in the area you are hoping to make your purchase. How strong is the rental demand? What is the average monthly rent? Who is renting in the area – college students, families, singles, etc.?
Features of a Profitable Rental Property
As an investor/landlord you have to remember that the property you choose to purchase is your business so it needs to make financial sense. Consider some of these features when looking for prospective rental homes:
- Neighborhoods. Where you buy within a town or city will influence the type of tenant you attract and your likelihood of vacancies. For example, if you buy near a college you will probably have a good amount of interest from students but higher rates of vacancy during summer and shorter term tenants.
- Employment. Does the area have steady employment opportunity to support residents? Is there a new corporation coming to the area? Tenants will typically flock to areas with growing employment needs.
- Amenities. Just like a primary home purchase, renters will want to be near amenities, such as schools, gyms, shopping, restaurants, public transportation, etc.
Your Investment is Your Business
Even if your real estate venture is strictly for supplemental income, you must treat it as a business in order to be successful. What is it going to take to achieve positive cash flow? It is better to own an asset that produces income more than generates expenses. Think about your short and long term goals and devise a business plan to keep you on track with the property.
Keep in mind the costs associated with the purchase and maintenance of a rental property, including:
- Vacancy allowance. As a landlord, you must entertain the possibility that your property will go unrented for period of time. Gauge the market in which you are looking to purchase to determine what reserves you will need on hand if vacancy occurs.
- Maintenance. Experts suggest budgeting 10 to 20 percent of the property’s annual rent to have on hand in the event you need to make repairs.
- Mortgage requirements. Typically, investment property purchases require a higher down payment than a primary home purchase. Speak with one of our mortgage bankers to determine your best route for financing.
Want more information on the journey to becoming a landlord? Our Investment Guide is a great go-to for first-time investors.