Joining the ranks of real estate investors can add a healthy cash flow to your portfolio. New to the game or seasoned in investing in real estate, being a landlord is often seen as an incredibly reliable source of wealth as rental income is largely passive. However, buying an investment property, especially for first-time real estate investors, requires discernment and an affinity for business practices that goes beyond simply collecting the rent.
Here are three things you should consider before jumping in with both feet.
Investors need to weigh market movement into their affordability assessment. Of course, the goal is that the investment property you buy now will increase in value in the future months and years, adding property value while collecting rent. The market is anything but static and that can work in your favor, but it can also increase your costs.
As a property’s assessed value increases, so do other expenses that you need to stay on top of. Property taxes will steadily climb as will insurance costs. It might not be much compared with the value of the property, but if you have a multi-unit investment property, the costs can feel significant.
Think you’ll just add increases costs to the rent prices? It might not be that simple. Some areas of the country have a rent ceiling that you won’t be able to bust through and increases costs could cut into your profit margins. When you make a purchase, think about its sustainability and the related market over the course of time you plan on holding it.
Buy what people want, not what you like
Where many investors get trapped is when they see single-family homes that they personally fall in love with. “It has good bones” and “I can see myself living here” are phrases that act as warning signs when you’re buying an investment property. Since you are going to be a property owner and not a dweller, maintaining a purely objective view is crucial.
Partner with a real estate agent that you know can be trusted to provide honest – even brutal – feedback to helpy ou keep on track. The simple fact is that what you like in a home might not be what renters are looking for. Buying that property might limit your potential rental income or it could be tough to fill a vacancy at all.
Management is essential
High-performing rentals have something in common: they’re well managed. When you hire a property manager or management firm, they not only should be leaned on to keep the property in good shape but occupied to capacity as much as possible. That requires marketing skills on their behalf.
If you’re considering being your own property manager, understand that it isn’t has hands-off as you might be thinking. In addition to paying the bills, you may need to knock on the door to collect past-due rent or stop in to fix a leaky tap or broken-down appliance occasionally. You’ll also need to If that sounds uncomfortable, you’re best bet is a property manager.
Should you buy the property intending to manage it yourself and later need to switch to a pro, the added cost cuts into your profits. Rates are usually between 5% and 15% of the income it generates. Does that put you in a tough spot financially?
Get ahead with the right mortgage lender
Everything is lined up and you’re ready to make an offer on a rental property? Your mortgage lender will get you across the finish line, and that’s where MBANC specializes. We help you save money with competitive interest rates and a range of mortgage products available. We help you get funded and get to close fast with most mortgages ready to close in 30 days or less.
Have questions about credit score requirements? Curious about documentation requirements like tax returns and W-2s? Want to get approved for a mortgage you’ve already been turned down on elsewhere? Reach out to MBANC today to have all your questions answered.