Top 6 Tips of Real Estate Investing
Real estate investing can be a great way to earn income while waiting for the market to appreciate. A good place to park some cash outside of fluctuations the stock market. Here are a couple of pieces of key advice:
- You Don’t Have to Live There. This the most important rule to real estate investing – you don’t have to live there, just find a place where someone else does. I get it, you want to be in a certain part of town near your work or in a specific school district. Maybe you can’t live without a bathtub, a garage or a fenced yard. That’s all fine for you personally. It’s just important that someone wants to live there and is willing to pay you for a fair market rent for it.
- You Still Don’t Have to Live There. There are a lot of factors that are important to you as an individual homeowner. Maybe you cook a lot and can’t live without a gas cooktop. Maybe you hate tile floors. Those are luxuries you as a homeowner can afford. However, those may not be factors that a renter can really negotiate on. What’s important as a landlord is a property that is easier to maintain. That means, tile over carpet (easier to clean in between tenants) and electric over gas (electric is easier to maintain).
- Look at the Market Nearby. We’veestablished you won’t be living in this rental, but it’s important to make sure someone wants to live there. Look around to see what similar properties rent for in the area. Zillow is a good place to start as it may give you a Zestimate of what your home would rent for. However, Zillow can be quirky and like all things free, sometimes unreliable so ask a realtor to pull some rental comparables in the area. Rental property prices listed by realtors tend to skew a little high compared to properties listed by owners, but between the two resources, you can see what the market is like in the area.
- Budget for the Unexpected. Houses, even brand new ones, need repairs. Plus, stuff just happens – plumbing breaks, air conditioning stops cooling or an appliance wears out. You’ll need at least one month’s rent to pay for these things.
- Plan for Vacancies. It’s unrealistic that your property will always be occupied. Tenants move (or stop paying rent and have to be evicted). Make sure to give yourself a rent cushion so you can survive if the property is empty for a month or two.
- Make Sure It’s Worth It. Remember, this is a business. Factor in all your costs and make sure you can afford it. Here’s my back of the envelope calculation for a property that cost $100,000 to purchase.
Income:
Monthly rent $1000 x 11: $11000
Expenses:
Monthly Mortgage of 80% loan
(5% rate) $429 x 12: $5148
Yearly Repairs: $1000
Getting tenants (advertising,
expense of empty unit): $1000
Property taxes: $2000
Insurance: $500
Total Income: $11,000
Total Expenses: $ 9,648
Estimated Profit: $ 1,352
This is just a rough estimate. Obviously, lots can change your equation to the good – a higher down payment, paying cash for the home, higher rents for the property or 100% percent occupancy all year. Similarly, a lot can change the equation downward, such as an expensive repair like needing a new roof, higher than expected taxes or a lengthy spell without a tenant.
One thing this calculation doesn’t factor in is appreciation. Ideally, your property will increase in value over time and that once $100,000 property may someday be worth $150,000. However, that’s hard to bank on year to year. Ideally you want to be able to make a profit every year based on operating income without relying on the asset’s value. Think hard though – is all this worth it for you for that much a year?
Contact me if you want help considering a real estate investment.
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