Property values are finally on the rise. According to the National Association of Realtors, the median price for single-family homes is up 8.2 percent from last year. With property values increasing, investors have once again rediscovered the value of housing. NAR also reports that individual investors comprise the bulk of cash sales. Many of those investors are searching for a stable, long-term source of additional income.
If you're considering joining the flocks of investors who are turning to real estate, here are some tips to help you make the most of available opportunities.
1. Consider Turnkey Real Estate Investing
While many people are drawn to the idea of investing in real estate, they are not necessarily interested in doing all the dirty work. If you prefer not to find properties on your own and renovate them for investing, consider purchasing a turnkey rental property. There are many companies that purchase inexpensive homes, renovate them, and even do all of the heavy work of finding tenants and selling the properties to interested investors. Some of those companies will even manage the property for a fee after the property changes hand.
2. What Is Your ROI?
As is the case with any investment, it's important to determine the value of your potential investment. The best place to begin is by calculating the cap rate, which is the rate of return on a property, based on anticipated annual rental income, divided by the purchase price. Higher cap rates drive higher potential returns. At the same time, however, you must also determine potential risk, as returns can be affected by risk.
3. It's All About Location
Location is critical to succeeding with real estate investing, but it's even more vital if you plan to be physically involved in the management of your rental properties. Consider local economic data, including unemployment rates, job growth, and rate of migration. Study the local demographics as well, to understand as much as possible about the local market's supply versus demand.
4. Choosing a Rental Property
Profits in real estate are made by buying low. The best way to do this is usually with REOs and short sales. It's usually a good idea to work with a real estate agent who has direct connections with banks and experience handling sales for distressed properties. You will also usually find excellent opportunities via probate sales, foreclosure auctions, and estate sales. Keep in mind that while the price of a property is important, it is not the only factor to consider. You should also think about the stability of the neighborhood and the type of tenant that area is likely to attract.
Whether you are able to obtain financing for a property purchase or not, you will still need cash to succeed with real estate investing. With most investment properties, you should plan to have sufficient cash on hand to make a down payment of at least 20 percent, as investment properties do not quality for mortgage insurance. Multi-family homes will typically require a down payment of at least 25 percent. Additionally, you will likely need a higher credit score. Along with enough money for a down payment, you will also need to have cash reserves for operational costs. When possible, it's always better to purchase an investment property in cash so you do not have to worry about interest payments.
6. Renovating Wisely
Before you purchase a home, it's a good idea to have an experienced general contractor tour the property and determine what it would cost to fix it up if you move forward with the purchase. This service will usually come with a fee, but it can be a good investment and help to ensure that you do not purchase a property that simply does not make good financial sense in the long term. Once you do purchase a property, take some time to get a feel for the local neighborhood to ensure your remodeling plans stay in line with what is appropriate for the local area.
7. Property Management
Unless you plan to make property investing and management a career, you may find it beneficial to hire a property manager. Plan to pay between 8 and 10 percent of the monthly rent for this service, which includes regular property inspections, performing background checks on prospective tenants, rent collection, and if necessary, tenant eviction. Additionally, the property manager will also be on-call in the event of an emergency.
8. Finding Tenants
If you decide to manage your rental property on your own, avoid the trap of taking the first tenants that come along. Conduct your own criminal background and credit checks, and request at least two previous landlord references. Companies like VerticalRent provide such background and credit check reports. Remember that you will need the applicant's permission to run these types of checks.
9. Protecting Yourself from Liability
As a landlord, it's important to take steps to protect yourself and your business from liability. Forming a limited liability company (LLC) can protect your assets from risk in the event of an accident. You will also need to protect your assets with a dwelling insurance policy to cover property damage as well as a liability policy.
10. Planning for Taxes
One of the most common mistakes that many new investors make is failing to plan for taxes. Make a point of consulting with a tax professional with experience in real estate investment to help maximize allowable deductions.