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Real estate investment is one of the most lucrative ways that you can put your money to work. Many stories of success come from a healthy real estate portfolio, but much like any business, there are risks associated with it too. Experts agree that you need to educate yourself about the ins and outs of the business first.
Are you looking to buy an investment property? Investments are quite an exciting option, with real estate being among the most rewarding of them all. Here’s everything you need to know about buying an investment property. These can help you know what to do to help mitigate your risks.
You Need To Invest With Cold, Hard Logic
One of the most important skills that you have to develop as a property investor is to base your purchases on cold, hard logic. It sounds uncaring, but when your money is involved, the last thing that you want is to get your emotions high. It’s not going to be your home, so thinking with your head instead of your heart is crucial for business.
Negotiate for the best price that you can. Find ways to talk down the price and get a better deal, regardless of the sympathy you feel for the original property owners. The lower you can get the price, the bigger your potential bottom line can be.
Make sure that you’re buying a property that will have a return on investment (ROI). Consider what kind of improvements you have to do and the cost to make the property viable. If your numbers are saying that it’s not right, it’s best to follow the data.
Build Your Knowledge of Property Management
If you want to grow your real estate business, knowledge about home maintenance and property management can be crucial. Ask yourself if you know your way around unclogging toilets, replacing wallpaper, and knowing your landlord responsibilities.
You can consider hiring property managers and measure the value that you get against doing it yourself. DIY involves consuming your time, stress, and money for repairs, something many are unwilling to do.
Even if you have a smaller portfolio of one or two properties, it’s best that you leave repairs to the experts. While this can save you a good chunk of money, you’re putting yourself at risk, including making bigger damage. Make sure to hire certified professionals with insurance.
Do you think you’re not cut out to be a handyman? Find a team that can do these things for you. A crack team of cleaners and contractors should be able to work out the kinks for you.
Consider Desirable Features for Investment Properties
When it comes to investment properties, consider what type of tenants you’re looking for. Depending on several factors, you can adjust your pricing accordingly, especially if your property is on high-traffic real estate. The more amenities your area has, the bigger the bottom line can become.
What makes a desirable investment property? A few areas to consider include:
- Crime rate
- Local job market
- Local tax laws
- Listings and vacancies
With this data, you can extrapolate the estimated value of your property and what ROI you can expect from it. It’s best to think like a tenant with your property. Spend time understanding if a potential investment is desirable. Cheap doesn’t always mean good and knowing these features are half the battle.
Choose Your Investment Partners Carefully
An investment partner might be a great idea, especially if you’re trying to manage your business finances. You can start pooling your money, split costs, and even work on different aspects of property maintenance. On paper, it sounds like a fantastic idea, but consider the potential risks when working with a partner.
Buying splits potential income from your real estate investments. It also creates a potential legal liability if your partner unilaterally decides on something without your knowledge. Any neglect a partner does will also reflect on you, as you both own the same property.
Consider the right investment partner that works for your needs. You want a partner that’s both trustworthy and understands the stake of both your investments. Find someone that is both responsible in ownership and proactive in maintenance, as a rift now can tear your business portfolio.
Understand The Intricacies of Downpayment
When it comes to expenses, the biggest pain that any would-be property investor gets is the downpayment. You would need to consider the intricacies of downpayment and if you have enough money to pay for it. Unlike an actual home, your real estate investments will have downpayment details.
For starters, downpayment on investment properties goes at least 20%, instead of the usual 3% for residential homes. Mortgage insurance does not apply to such properties and they also have stricter regulations and approvals to go through. Your expenses don’t end here too.
Consider that there are further renovations that you’d need to do. If you’re short on cash, bank financing can be a good option to consider, including personal loans. Beware of high-interest rates when looking for financing, as you would still need a cash cushion to keep you financially stable.
Look Into Property Taxes
Property taxes are a must in any community. These are taxes you pay to support your local community, as well as your local government. Depending on where you live, this can go as low as half a percent up to 2.21% in some prime locations. If your investment property is worth more, chances are you’ll be paying more money in taxes too.
Check with a local real estate agent to calculate the potential taxes that you will incur. Remember that you will be consistently paying for these taxes, so you need to calculate them into your expenses.
Pay Your Existing Debts
If you’re a new investor, it’s best to keep your portfolio free from existing debt. If you have existing student loans, mortgages, medical bills, or even dependents, investment properties might not be in your alley right now. A good investment portfolio means you’re not carrying debt with it.
It all boils down to desirability. If you’re investing, there’s a likely chance that you’d need investment loan options. With debt, you’re a less desirable option for financial institutions. The recurring cost of the investment will add to the existing weight of your debts.
Sure, in some instances, you can get away with having debt in your portfolio if your returns are more than your debt costs. Regardless, you would need to have the necessary safety net to keep your investments afloat. With debts, you’re limiting your financial flexibility.
Much like every business out there, buying an investment property can either earn you money or lead to disaster. It’s a matter of risk mitigation and preparing for the worst when it comes to investments. If you can follow these things that you need to know, you’ll surely make good headway into your property.
By Sophia Young