If you’re looking for real estate investing tips, you’ve come to the right place. I have personally owned investment real estate for years. With that comes the good, the bad and the ugly and I’m not talking about the movie. If you’re like me, learning more real estate investing tips is a must so you can be a better investor. So before you launch into the world of real estate investing, here are a few items you’ll want to consider.
1. Estimate the Down payment
Typically the lender will ask for at least a 20% down payment, and if you pay more than 20%, you will sometimes get better rates. For example, if you want to purchase a property which cost $500,000 you may be required to make a down payment of $100,000.
2. Calculate the expenses
If you are planning to purchase the property for rental income, taxes are a factor you must consider. Real estate investing tips often center around the gross income. However, do NOT forget to calculate the ‘net income.’ You will have expenses such as taxes, maintenance, fee’s, and carrying cost especially if you have a loan on the property.
3. Always invest in a project which gives a return of more than 1%
Before investing in real estate, calculate your possible rate of return. I attempt to look for houses which provide a monthly return of around 1% gross. For example, if you find a home valued at $100,000, you need $1000 per month gross rent to meet my 1% goal ( $12000 annually).
4. To be big—start small
If you’re new to the real estate business, don’t put all your eggs in one basket. Start small—maybe a single house or duplex. As you learn the process, manage renters, or sell the house for a profit, then apply the knowledge to a larger project.
5. Compare your gross rental yield to the risk-free rate
The risk-free rate is the 10-year bond yield. Investors say “risk-free” because there is little to no chance that the US government will default on all their debt obligations. Without a risk premium, why would you invest your money at all? So all investments need a risk premium over the risk-free rate. What the means is, if your risk-free rate is less than the annual gross rental yield of the property investing is pointless. Here’s an example. Suppose the risk-free rate is 3% annually. If the gross rental yield is 2% or less than either, then you need to bargain harder or, pass on this purchase. You’ll earn more in bonds than real estate in this situation.
6. Growing rates can increase the rent
If you have the money and want to invest in real estate, don’t rush. Research to find areas with good rental rates. For example, if you find an area where you can purchase a three bedroom house for $100,000 and rental rates are 1% of the total cost, that may be a sound investment. However, a little more research shows there’s another area where you can invest $150,000 for a three bedroom home, and the rental rates are 2%. Now you can see why the first option, which will yield $1000 per month, isn’t the best investment. If you go with the second alternative, you’ll generate $3000 per month instead. So definitely do your research before you jump right in.
7. Understand how location relates to home values
I love this real estate gem from Bill Gassett, “I have seen numerous buyers purchase properties without understanding the value of various locations. They think they are paying a good price based on square footage, bedroom and bath count, etc. without having a grip on how an area can have a dramatic effect on value.”
In your research, you may be able to find a location which has the potential for major growth. I’ve known real estate investors who purchased property for $100,000 today and then turned around, sold the investment in a short period of time for double what they paid. This type of increase can often be found with diligent research.
8. Expect the unexpected from Tenants
Plan for an element of surprise from any tenant, no matter how well you may think you know them. Expect the worst and hope for the best! Rental residence planning usually involves extra money. It is not uncommon to experience a period where you have an empty home or unexpected repairs, and unfortunately, non-paying tenants. That makes it critical to have an untapped reserve of funds available for those draining time periods. Irresponsible tenants can be costly. You can expect to pay anywhere from $500 to $5000 per month to repair the things that don’t function properly. So definitely be selective and properly screen your applicants.
9. Enjoy being handy and fixing things
Remember those unexpected repairs; I mentioned earlier. Not is it imperative to have extra cash on hand in these situations, but it also helps to be able to tackle some of those yourself. I prefer to have a cash cushion of roughly 10% of the property’s value to address anything requiring immediate repair. This is just a guideline. You may need to have more for your particular situation.
10. Always check comparable sales
The easiest way to check comparable sales over the past six to twelve months is to work with a credible real estate agent. Tax records, sales history, and comparables are also helpful in this area. You need to compare your target property’s asking price with previous sales to make sure you are getting the best deal possible. You want to make money, not lose it.
I hope this article helps if you are already involved or planning to venture into the real estate investing world. Contact us if you’re looking for more specific details.