Did you know that real estate has produced more wealth than any other industry in the history of time? Retail real estate alone has produced an average annual return of 10.8% over the past two decades, according to data from the National Council of Real Estate Investment Fiduciaries Index.
However, as with any other business, property investing isn’t without its pitfalls. If not wisely planned, the cost of the property investment can quickly override the profits.
If you are considering investing in property, here are top 5 financial tips for you:
Research your prospects
When it comes to real estate, research is key. It could mean the difference between success and failure.
As a real estate investor, you should have two primary goals when buying real estate: rental income and capital appreciation. This means that the property you intend to buy should not only be able to attract a steady rental income but should also increase its value over time.
Purchasing a property in a popular neighborhood will guarantee this, but, your pocket will suffer immensely. To get the best value, do some market research and identify upcoming neighborhoods.
Once you identify the ideal neighborhood, the next thing you should do is follow the property trends in that area. After analyzing the trends, you should be able to identify the right type of property popular with tenants.
Thoroughly inspect the property
Let's say you've found the property you've envisioned, it’s at the right price, and its condition looks pristine. One thing to keep in mind that properties for sale are almost always “dressed up” by the owner.
The “dressing up” helps reduce potential flaws and accentuate the property’s best features.
For the savvy property investor, inspecting a property’s condition is an important part of the property-buying process. Keep your eyes open for signs of damage that can cost you a fortune to fix down the road.
Look out for signs of pests or molds, damaged rooflines, leakage in bathrooms, cracks on the walls, and foundation damage. Serious foundation damage, in particular, can be a costly affair to fix.
Make the property tenant-worthy
Make the property attractive to tenants. This will not only lead to better rental income, it’ll also add the property’s value. Making it attractive, however, means you have to dig deeper into your pockets.
So, how do you fund property renovations? Well, if you haven’t saved up some cash, it’s possible to use your home’s equity to create a line of credit loan.
Choosing the right property upgrades is very important. The right upgrades will help entice tenants to stay through multiple lease cycles. Here are a couple of upgrades that can maximize your property’s value.
Hire a property manager
Managing tenants isn’t easy. A property manager will help you with this. They will help you save time, money, and headache.
A property manager will help you find and keep great tenants, manage your property’s maintenance and handle any legal problems.
When you hire a property manager, expect to pay them about 10% of the monthly rental income. And the best part is that property management fees are tax deductible.
Use your home equity
Equity is the difference between your home’s value and how much you owe on it. For instance, if John’s home in Tampa is worth $400,000 and he owes $250,000, his equity is, therefore, $150,000.
However, keep in mind that the bank won’t lend you the entire equity amount of $150,000. Why? Because it’s possible for the prices of homes to dip.
Usually, banks will lend you eighty percent of your home’s value, less the amount you owe against it. That means, in the case of John, he’ll only be able to get $70,000. This is because, his usable equity is $320,000 (80% of 400,000) minus $250,000, which equates to $70,000.
Before dipping into your home’s equity pool, it’s important to remember a couple of things:
- Don't lose focus on paying your home loan as quickly as you can. Yes, the equity you use to purchase an investment property is tax deductible. However, the remaining debt is not.
- Preferably, don’t use the entire available equity at one go. Why? Emergencies can occur when you least expect them. As such, keep some reserve for the rainy days.
- Having usable equity doesn’t mean you’ll always get an investment loan. To determine your eligibility, lenders consider several factors such as your age, income, and job status.
- Sound financial advice is key to sound investment. Before investing in any property always do your market research.
For many people, investing in property has turned out to be a successful venture. However, for the not-so-lucky ones, it has turned out to be a money pit. To minimize the chances of falling into this unfortunate category, ensure you get a solid education on property investing first.