Make money while renting your homes
There are countless people who became wealthy due to buying and holding real estate. By buying homes, you can amass a large quantity of money while also getting some tax benefits and building home equity through appreciation over a period of time.
To make such an important move, it is vital that you carefully plan a investment strategy so your money remains safe and sound.
Profit. What should I lookout for?
Well firstly, there is a good idea to make a broad market research. You have to carefully weigh one property over the other and make a call, because once you made it, you can’t go back easily. Not only that, but your profits are perfectly tied to your property. Paying too much will slowly eat up your profits in the long run.
It is preferable to buy as low as you can under the market value. From 10% under the market value you should start to see some profit but nothing too major. It gives you a sense of financial security while also giving you the option to sell in a hurry if that is required with a bit of a negotiation room.
Knowing what rate you are going to ask for is again, really important. Checking around the area in order to see the average rate is key. Ideally, the rent that you want to ask should be at the very least 1% of the purchase price.
Also buying a good property is extremely beneficial. You do not want to end up with a bottomless money pit. Too many repairs and a high cost will eat up your profit in the long run, but be careful though. There are a bunch of hidden gems around which might seem like the money pit that we talked about, but in reality need just a bit of love and TLC.
There are many expenses that you need to add into account, including:
- -Mortgage interest
- -Mortgage insurance
- -Property taxes
- -Property insurance
- -Repairs and maintenance
-Property management fees
It would be really preferable to generate a minimum of 15% ROI(Return of Investment). In simpler terms, your collected rent minus the debt and expenses should make 15% or more. As an example, a 30.000$ down payment would require a minimum annual cash flow of 4.500$(30.000$ multiplied by 15%). By doing so you are above your break-even point, and you are not risking anything if you experience vacancy or repairs.
Location. The most important thing in real estate.
Real estate is strongly linked to location. A good property has a good location while a bad property has a bad location. When you intend on renting out, not only the house will attract tenants, but also where it is located. Having shops, roads, important transit routes, employment is extremely important. No one wants to live in the middle of nowhere. Also, people want a low crime rate, a park or a certain place to recreate and a good school.
Buying a property in a good neighborhood that will only improve in quality of life will only give you benefits. Faster appreciation, thus more equity in the property and obviously more money.
Also, if there are a lot of vacant homes in the area, is it really worth the fight? Every renter would want to fill their property and that means a lot of competition and a high chance of your property to remain empty. Also, if the area is vacant, that would mean that something is probably wrong there. Maybe a lack of shops, roads, important connections.
Property taxes can be the bane of your real estate dream
Property tax is a specific tax that needs to be paid on a year basis. You should know the current tax rate, because if you don’t it will be the death of you. As the area continues to improve in terms of development and infrastructure, often enough the tax rate will increase too. Basing your profits on an old property tax rate can end you when the next bill comes around.
Vacancy is to be expected
Only in a dream world there is such thing as a property filled with tenants at all times. Seeing how we are living in the real world, it will sometimes happen that your property will be empty. Don’t worry though because it happens. All you need to do is expect it and have a surplus of money if something goes wrong and a tenant suddenly leaves. To be safe, you should be able to get away with a vacant unit for up to four months.
Save some money for repairs and maintenance.
There will be times when something breaks, be it a broken window, leaky faucet, a new appliance. Stuff like this cost money. True, most of the times you will be able to pay from the collected rent alone but sometimes, you will have to pay out of your pocket. Because of this, it is important to have a fund made specifically for such events.