Do you want to extend rental investment portfolio? These properties give rewards if you made right choices while investing. Given below are some crucial ways to follow while buying Rental property:
Contents
- 1 1. Secure a Specific Down Payment:
- 2 2. Find the Right Location:
- 3 3. Compare Purchasing with Financing
- 4 4. Not Go For High-Interest Rates:
- 5 5. Calculate Your Margins:
- 6 6. Invest in The Landlord Insurance:
- 7 7. Calculate All Operating Expenses:
- 8 8. Determine Your Return
- 9 9. Buy Home that has Low-Cost
- 10 Bottom Lines:
1. Secure a Specific Down Payment:
Investment properties need more down payment than owner-occupied properties. As investment properties have more firm rules for approval. Putting a 3% down payment for house where you are residing is not enough. At least a 20% down payment is necessary for investment property. Because mortgage insurance is not an option for rental investment.
2. Find the Right Location:
The next way is to consider the best place for rental property investment. Like those areas where there is a decline in property and not stable steam. A high population growth city will represent investment opportunities. And the city should have a specific renewal plan is in progress.
For profitable rental area, you must go for property where property taxes are low. Also, school facilities, parks, hotels, and malls are available. Low crime rates at neighborhood and emerging job markets indicate a big pool of renters as well.
3. Compare Purchasing with Financing
Buying with cash or financing investment property is based on investment goals. A monthly positive cash flow appears through cash payment. For example, there is a rental investment property with $100,000 buying ost. Through rental income, income tax, depreciation, and taxes, cash buyers will get annual earnings of $9,500.
Whereas, financing will provide huge return on investment. For those investors who are putting down mortgage of 20% on the house along with 4% compounding on a mortgage, will observe an additional earning of $5,580 every year after removing additional interest and operating expenses. In this case, cash flow is less. But, the annual investment return is greater than the cash buyers.
4. Not Go For High-Interest Rates:
In 2020, borrowing money costs may be cheap. But there will be a high-interest rate on a rental investment property than that of a typical rate of mortgage interest. If you planned for financing property buying then consider a low mortgage. As this will not reduce the monthly profit level.
5. Calculate Your Margins:
It is important to calculate profit margins. Wall Street companies usually purchase distressed properties seek for 5% – 7% return. The reason is they need to make payments to staff. A 10% goal is important for individuals. Property maintenance costs should be at 1% of the value of property per annum. Some other costs are property taxes, association fees of homeowners, and insurance. There are some monthly expenses such as landscaping and pest control.
6. Invest in The Landlord Insurance:
Secure new property investment. Along with homeowners’ insurance, try to buy landlord insurance as well. This kind of insurance usually covers damage to property. Liability protection and lost rental income are also covered. Some injury cases due to property maintenance are also covered.
7. Calculate All Operating Expenses:
The operating expenses for the new rental property are usually between 35% to 80% of gross operating income. If rent charges are $1500 and expenses are $600 every moth then operating expenses are at a 40% rate. An easier way is to employ a 50% rule. Let’s say rent is $2,000 then total expense will be $1000.
8. Determine Your Return
This is important to calculate return on investment. There is usually a 4.5% return on bonds and 7.5% on cash payment. If there is a 6% return on investment then it is a healthy return for the landlord. And this number must increase with time.
9. Buy Home that has Low-Cost
If the home is costly then there will be more expenses for owners. According to experts, $150,000 home is enough in the neighborhood. Also, never purchase good looking houses available at the block for sale. Similar is the case for the worst horse available on the block.
Bottom Lines:
Always have realistic expectations. As through any investment, not huge paychecks are produced by the rental property. And the selection of the wrong property will be a big mistake. The topmost suggestion is to contact an expert before investing in 1st property. And the next suggestion is to rent out the personal house for checking out landlord skills.
