Things To Look For In A Real Estate Investment!
So, you’ve decided this is the right time to start investing in real estate. Smart move!
Real estate investments are a fantastic way to increase your net worth; but remember, it won’t happen overnight. You need to stay in the game for the long term to see high returns on your initial investment.
There’s a long list of factors you need to consider before and during your search for just the right property, but we’re here to help. Here are 7 tips to start you out when looking for your very first real estate investment:
This is long known as the key factor in choosing property. Is it in a city setting, or out in the country? Are there shops, restaurants, theaters and other entertainment venues nearby? Is it a walkable community? How about gyms and public transportation? Or are there old industrial buildings in the area, aging roads and other signs of decline?
In the best of all worlds, the location would be near a tourist magnet, like a beach or a popular city. Another major factor that comes into play is how close do you live to the house you’ll be renting out?
If you plan to oversee the property, do the landscaping, collect rent, and take care of any emergencies that pop up, you will want to be in close proximity. But if you’re planning on hiring a property manager, it’s less urgent than you live nearby.
Take a look at the number of vacancies and open listings in the neighborhood. You will need to get at the root cause for this. Maybe you will find a neighborhood with an unusually high number of listings. This could mean prices are too high on properties, or even that no one wants to live there because homes aren’t great or lack a prime location.
Keep in mind that high vacancies mean you will likely have to charge lower rent to attract potential tenants. Lower vacancies, however, mean properties are a hot commodity, and you may be able to up your rent considerably.
Research criminal activity. Many people skip this step, but it’s hugely important to look at crime stats for each neighborhood. You don’t want to buy next to a flophouse, or where drug deals happen on the street corner.
Local police stations or even the public library should give you access to this info. Check the rates for vandalism, serious crimes, and petty crimes, and whether criminal activity is on the rise or the decline.
You should also ask whether or not there is a neighborhood watch group keeping an eye on the streets and properties.
Find out the property taxes. These vary widely from place to place, and high taxes could quickly eat into your profits. However, higher taxes sometimes signal the wealth of the neighborhood, and if you can afford to buy there, you could fetch a hefty rental amount.
But average annual taxes aren’t always a reliable measure of worth; there are high taxes in undesirable locations too! Head to the town’s assessment office to look at tax info on file, or you can talk to neighbors to see what they pay.
Check out the local job market. Ideally, you want to find a property in places with a hot job market. Great jobs bring in more people, and that means you could have your choice of tenants. Maybe there’s a large company planning to move into the area that will be looking for people to hire.
Or, on the flip side, there may be businesses closing that will be laying people off, which can cause a downturn in property values. Check out the type of company that’s scheduled to open, and if it’s not something you’d want in your own backyard, chances are good renters won’t either.
What are the schools like? Unless you’re specifically looking to rent to older adults, chances are good a starter home will attract a growing family, and that means a house full of kids. Parents want excellent schools near their homes.
How can you tell if they are of high quality? Your state’s education department regularly ranks schools for qualities like test results and student/teacher ratios. Basically, you want to see happy kids in newer school buildings with teachers that are creative and knowledgeable.
Just because you may not have kids, it still comes into play with investment property.
7. Average Rents
How much can you charge? Making money on your property is all about how much you can charge for rent, so you need to know what the average rent in the area is.
Take time to do the math! You need to make sure any property you consider will pay for the monthly mortgage, taxes and other fees, and maybe even leave wiggle room for a small profit.
Yes, your place might outshine all other vacancies, but when it comes down to dollars and cents, potential tenants may not want to pay more for an extra bathroom or a balcony with a view.
Always use averages in the neighborhood to set your rent, not what you think the place is worth it. We all tend to overestimate, and the longer your site sits vacant, the more money you lose.
Owner Occupied Or Not?
While you’re working your way through this list, one of the biggest questions to answer is whether you will live at the property as an owner occupant and rent part of it out (such as a duplex or multi-family dwelling) or if you will stay in your own home.
There are big advantages and disadvantages to both!
Here’s a rundown on why it’s a good idea to live in your new multi-family property:
- Save money on interest rates. Financing is faster and less complicated. Mortgage companies typically charge higher interest rates on properties that are not owner-occupied.
- You’ll tend to look for high-quality tenants. If you’re living in one of the apartments at the tri-plex, you won’t want to live next to bad tenants. If you’re going to be neighbors, you’re going to be selective about who you let move in. Also, renters who plan to behave badly usually like to be as far away as possible from their actual landlord as possible.
- Write-offs on ownership expenses. Owners that occupy their rental buildings get to write off all of their rental expenses against their rental income. For example, if you have to repair a broken water main connection, sadly, tax laws won’t allow you to write off that repair to your personal residence. If the water line for your rental property breaks and you live in one of the apartments, you can write off some of the repair costs to the units where your tenants live.
- Manage the property yourself. Hiring a property manager can take 10 percent or more right off the top of your rental income. If you live there, you’ll be familiar with the place, keep it well-maintained, and you can fix things before they become a real headache.
- Keep an eye on your tenants. You will see and hear everything that goes on in the apartment and house. That means your tenants are less likely to party the night away, smoke indoors, throw trash out back, bicker with the neighbors or anything else that can go wrong without you there to keep an eye on things.
- Write off depreciation as the building ages. You can get a credit on your taxes for the tenant-occupied sides of the rental property. Through depreciation, property owners claim a portion of their building’s value as a deduction against expenses every year, simulating the gradual aging of the building. Typically, the depreciation carries hundreds, if not thousands of dollars a year in tax savings that a single-family homeowner isn’t legally allowed.
- Itemized deductions. These are the homeowner’s benefits. As the resident of your rental, you get all of the same deductions as any other homeowner. You’ll be able to deduct a portion of your mortgage interest, property taxes, and any deductible points that you pay. You can use the Schedule A form to get all of those write-offs as itemized deductions.
- When something goes wrong, you’re on the job. It will take you literally seconds to respond when you live there, vs. having to find a plumber/electrician/HVAC guy, etc. if something breaks.
There are also plenty of perks to non-owner occupied sites:
- Your own space. You will be free to sunbathe, swim, wash your car with the stereo on, water the lawn in your pajamas, or whatever else suits your fancy, without someone right on top of you watching. Living in your own home and renting one even a few blocks away means you will still have privacy.
- Not knowing is less stressful. You won’t be there to see your tenant backing up to within one inch of the garage door, getting the newspaper in a short robe or denting the mailbox that they replace without you even knowing. You won’t know if your tenants leave in the middle of the night for vacation, let the dog pee in the flower garden, or play beer pong at a Friday night party in the backyard. If the neighbors don’t like it, they can complain.
- Let a property manager do the work for you. If you’re living in a different neighborhood than your rental property, you can hire a property manager to handle problems large and small. And their help can start even before you find tenants! They can market it, show the place, potential screen applicants, and do background checks. They will draw up a solid lease before tenants move in, then collect the rent each month. The property manager will be on-call, 24 hour-a-day, and that includes weekends, nights, and holidays. They will make friends with plumbers, carpenters, snowplow owners, pest servicers, lawn care people, electricians, and any other specialist he can call on for large and small repairs. Afterward, they will inspect the work and make sure it’s been done right.
- You mind your business, they’ll mind theirs. You won’t be able to track your tenant’s comings and goings. Maybe they got a FedEx delivery, and it sat on the front porch for a week. Or left the sprinkler watering the lawn all night. Or charred burgers on the grill bad enough to almost bring firefighters responding. These are all small nuisances you don’t need to worry about or even know about. If it’s causing an ongoing annoyance to anyone, you will likely hear about it from the neighbors. And if the property is damaged by some activity, that’s what security deposits are for.
- The lawn is up to tenants or the property manager, not you. Grass grows pretty fast in the summer, and chances are the lawn will need mowing every weekend. But not by you! Write it into your lease that your tenants will take care of this, or add it to the manager’s to-do list. Ditto for shoveling the driveway if you live in the snow belt.
Clearly, there’s a lot to think about and plenty of homework to do before deciding on the property that’s right for you. But it will be well worth the time!
As a conservative average, investment properties appreciate by around 5 percent each year. Not only that, but the rent is paying down the mortgage, which will also earn you a big pay-off in equity.
Play it smart, and you can funnel that extra income into your next great real estate venture, and before you know it, you’ll be giving advice to newbies about how you hit it big.