When to invest in real estate? Five questions for landlords.
July 26, 2019
There is plenty of information out there offering advice on whether and when someone should rent or own. But what about for an investor?
Turns out the approach with each is vastly different.
Although there are obvious factors to consider for a would-be resident (such as living expenses, location, and market value, et al), a separate set of criteria exists for future landlords. Here are five critical questions a home investor should ask going into the process:
1) What is the investment objective?
Simply enough, what kind of returns are you expecting? It’s easy to make a decision based on cash flow. The key is to have very clear monthly profit goals (an ideal minimum monthly net return is 7-8% on invested capital ), as opposed to if and how much the value of the home appreciates over time.
It’s also important to not think of yourself living in the house. Considering this, don’t get carried away by the market trends, the traffic situation, or even what the school system is like. It may not be where you want to live, but can it make you money? When purchases are based on an emotional decision is when investors start losing money. Instead, just look at the bottom-line numbers of what’s coming in and going out.
2) Do I have enough cash in hand?
Since investment properties are higher risk, be prepared to fork over a higher down payment. Banks will typically ask for at least 20-25 percent of the total value of the home. Make sure to get a prequalification.
Owning a property is like owning a small business. Therefore, get into the habit of setting aside 5-10% of the monthly rental income for property management and maintenance costs and putting the rest away and forgetting about it.
Considering this, it’s highly encouraged that every property gets a full inspection before purchase and new investors stay away from fixer-uppers at first. The numbers may all check out on paper, but then discover the house will soon need a new $15,000 roof or $6,000 air conditioner. That’s when you either need to be willing to walk away or go back and renegotiate.
3) Did I consider all expenses?
The biggest mistake first-time landlords will make is overlooking the amount of income the property will generate. Property investments shouldn’t be taking money out of your pocket every month. Therefore, take inventory of any other anticipated ongoing expenses.
Maintenance fees will vary depending on the age and condition of the home. Some communities, especially condos, will cover certain external issues, so make sure you’re well versed with the guidelines. Some properties will require HOA as well as Community Development District dues, too. Other factors include principal & interest, taxes, insurance, marketing expenses to list the property, management fees and anticipated gaps in occupancy.
4) Do I understand the risks?
Being a landlord is not for everyone. If you don’t like some stress and unexpected occurrences, consider investing in something else. But for those who don’t get rattled easily, it can be a reliable and steady source of residual income for years to come.
One huge way to make your life easier is finding the right renters. Nothing is better than a drama-free tenant who stays for years and pays on time. Make sure you do proper credit and background checks, and, if possible, make it a point to connect in person before finalizing any lease agreement. Anyone who is rushing you or attempting to make special provisions is usually a giant red flag.
5) Am I willing to be patient?
At the end of the day, it’s all about the money. If the numbers don’t add up, nothing else matters. Create an ROI worksheet and let the bottom line dictate your decision. If it checks out, go for it. Start small to get a feel for it. Be willing and able to play the long game and grow as you go.
The reality is that any time is good to invest in real estate as long as everything is lined up and the numbers meet your investment objective.