Wednesday, 24 February 2016 05:31

What Kind of Property Should You Start With?

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Real estate investing is an exciting field because of the many different niches and strategies you can use to customize your plan to fit your personality and position in life.

Perhaps you enjoy risk and would prefer a “fix and flip” business? Or maybe you are looking at long-term stability and would prefer investing in single-family rentals. Or, maybe you don’t want any involvement at all and would rather just “become the bank” by lending money to other investors and earning a passive return. There are hundreds of ways to invest in real estate, so find the strategy that best fits your lifestyle.

Here are some tips about what kind of property you should buy:

Well-maintained homes – The time, effort and money required to bring fixer-uppers into good condition make it difficult to get a good ROI on them.

Avoid fancy, expensive homes – The higher the home price, the lower the net rental income is compared to it.

Buy as personal residences, change to rentals – Owner-occupants get the best financing, and living in the house gives you insight into what needs to be improved before you sell it.

What is the Neighborhood Like?

You’ve surely heard the old cliché: “Location, location, location.” The importance of this phrase is no less vital when choosing a real estate investment. You don’t need to necessarily buy a house in the most expensive area of town, but it’s important that you understand what the location is like.

Pro tip: Drive by your prospective property at different times of the day, on different weekdays, to ensure you are comfortable with the location and that it fits within your plan.

Do You Know All Your Investment Expenses?

A common mistake by many first-time real estate investors is underestimating their expenses. Sure, most investors know there will be repairs from time to time, but there are numerous other expenses you may need to account for. These include:

  • Water/sewer
  • Garbage
  • Utilities
  • Legal fees
  • Accounting
  • Evictions
  • Vacancies
  • Office supplies
  • Scheduled maintenance
  • Capital improvements

A good rule of thumb to use when determining how much you should plan on spending for expenses is known as the “50% rule.” The 50% rule states that, on average over time, expenses on a property will equal 50 percent of the income. So if a property rents for $2,000 per month, you can assume $1000 in expenses per month before paying the mortgage payment.

How Will You Finance Your Property?

Real estate investors must decide whether they want to finance their properties with cash or mortgage loans. There are many different ways you can pay for an investment property. If you have the money, you can pay all cash and not deal with banks or loans.

However, if you don’t have all the cash needed or you’d rather utilize greater leverage, you can supply just the down payment and take out a mortgage to cover the remaining cost. If you do use a loan, be aware of the term and interest rate on the loan you are taking, and stay away from adjustable rate mortgages as they may go up, causing your payment to rise dramatically.

Do You Have an Exit Strategy? 

Finally, always start with the end in mind. This circles back to our discussion on “having a plan.” Know what you are going to do with the property before you buy it. Many investors, during the last housing boom, bought properties with only one plan – to sell soon for a higher price. When the market dropped, however, many of those investors lost their properties. 

Always have multiple plans for your investment, and know exactly how you plan on making money with the investment. Will you pay it off slowly over 30 years? Now what exit strategies are available for you, and plan, from the start, how you will exit.

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Prospect Realty is designed to service the residential Real Estate needs of everyone in the community.Servicing all aspects of residential Real Estate gives our Associates a more complete knowledge of the entire up to date Real Estate market and allowing them to better serve the community.

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