Buying real estate can be a risky endeavor, but if you do your research and invest wisely, it can really pay off in the long run. Buying a stable property and renting it out can give you a good source of additional income for relatively little effort, and if you’re an investor, it can help you diversify your portfolio. Now is actually an ideal time to invest; the housing market is beginning to recover, but interest rates and housing prices are still generally low. Before you go jumping into the world of real estate investment, though, you need to look at the costs and benefits of buying a property. Here are a few things to consider.
Look for a property with a positive cash flow. This may seem obvious, but you’d be surprised how many people decide to invest in an expensive property that won’t start paying off for at least 10 years (more on that in a second). You need to make sure that the income you’re earning from monthly rental is enough to cover all expenses, including the mortgage and any necessary home repairs, so that you’re ending up with a positive cash flow. Remember that if the money you put into a house was sitting in a bank, it would be earning interest—your goal with a real estate investment is to be making more than you would if that money were just sitting in the bank.
Know where there’s a housing demand. Think about what the typical renter wants. They probably want to live in a low-crime area and, if they have kids, they’ll be looking for an area with a good school nearby. They may also want to have easy access to public transportation and amenities like a grocery store or a mall. A location near a pristine park is also a draw. As much as possible, avoid purchasing properties in a rural or hard-to-get-to area, as there will be a smaller pool of renters and less demand for your property.
Don’t fall into the trap of an expensive property. Investing in a fancy house in a much-desired neighborhood might seem to make some financial sense because then you can charge more for rent, but this type of enticing property often results in a negative cash flow. Think about it: you’re going to have a higher down payment and higher monthly mortgage payments, and rent isn’t necessarily going to cover that. You also may end up paying more than you initially anticipated in order to maintain a larger, more expensive house.
Do your research when it comes to fixer uppers. Fixer uppers are another type of property that sound like a good idea in theory. It’s like the philosophy behind stocks: buy low, sell high. Buy a run-down property at a low rate, then fix it up to significantly increase its value and sell it for a higher price. And sometimes, this really does work out in the investor’s favor. However, you’re also taking on a lot of risk with this type of property. First of all, labor costs may be higher than you expect, and if you can’t do much of the labor yourself, it might not be worth it. You may also run into problems when you purchase an older house because the foundation may be unstable, there may be mold or water damage, and you might need to install new plumbing, wiring, or a new roof. If you are planning to buy a fixer upper, carefully research the costs for repairs before putting down your money.
Avoid risky properties with high tenant turnover. This might sound like another obvious point, but how do you determine what properties are risky? Generally speaking, college rentals, vacation rentals, or low-quality units in a bad area are likely to have a higher tenant turnover as well as tenants with shaky credit histories. Your goal should be to purchase a moderately-priced, stable property that you can rent for a long period of time to reliable tenants with a good credit score.
Investing in real estate can be a smart financial decision and a great experience if you go about it the right way… but if not, it can be a nightmare and a drain on your finances. It’s not a decision you should make lightly, but if you feel like you’re ready to get into real estate investment, take stock of your assets, talk to a local real estate agent and start looking at the properties that are available in your area.