You may have heard the advice: "it's always a good time to invest in real estate." If you've decided that an investment property makes sense for you, you may want to do a little bit of homework before you call your favorite real estate agent.
Real estate investing isn't a fool-proof guarantee for wealth building. But the right property, market, and mindset could get you on the road to a profitable investment.
Follow these ten tips when you're ready to start investing in real estate.
Pay Down Debt
Before you start investing in real estate, most financial advisors will recommend you pay down your personal debt. Student loans, unpaid medical bills, or college tuition for your kids — paying your debt down is a cautious and safe first step before you start looking for a short-term or long-term rental.
Secure Your Down Payment
You may have purchased your home with very little money down: 5%, 3%, or even zero down are all common when buying an owner-occupied home.
But investment properties have more stringent approval requirements and generally require larger down payments. You can expect to put 20% down on your real estate investment since mortgage insurance isn't available for rental properties.
You may want to put down even more than 20% on your investment property to limit your risks and increase your chances of getting cash flow positive; the bigger your down payment, the lower your monthly mortgage costs.
Find the Right Location
Where should you buy your investment home? It may be tempting to invest in the area where you live or your favorite vacation spot. But just because you love your hometown doesn't mean that it's the optimal location for your investment.
Take some time to do a real estate market analysis that includes:
- Housing market trends
- Interest rates
- Construction costs
Tip: buying in the Western U.S.? Check out the 5 most profitable places to invest in the west.
Crunch Your Actual Numbers
As long as your investment expenses are less than the rent you're collecting, your real estate investment should be in the black and earning you positive cash flow.
But miscalculating your actual expenses can be an easy mistake that eats away at your cash flow.
Your mortgage payment is only part of your investment expenses.
Your real estate investment will have one-time costs, like:
- Closing costs
- Real estate fees
- Down payment
- Possible repair/ renovation construction costs
And reoccurring costs, such as:
- Mortgage payment
- Possible HOA fees
Once you've calculated the true cost of your investment property, you'll be in a much better place to see if the area rents will cover your costs and earn you positive cash flow.
Look for the Right Property
Once you have an idea of what market you want to invest in and what your budget is for a home purchase, it's time to start looking for your property.
Some investors seek out low-price properties they can repair and renovate, while others want a turn-key property that needs little to no work. You'll have to decide which makes sense for you.
If it's your first time investing in real estate, small is typically safer. Look for properties In the low- to mid-price ranges.
Even if you've got a big budget, starting small will protect your investment. Even if you don't make the profits you expected, you have less at risk for loss if something goes awry.
Keep it Simple, Invest in Single
One of the easiest ways to get started investing in real estate is to invest in single-family homes.
With a single-tenant, you'll have less wear and tear on the property. And your costs for upkeep, repairs, and maintenance will be lower with a single-family property, too.
Use Your Head, Not Your Heart
Real estate investing isn’t about emotions; it’s about numbers.
When you purchased your owner-occupied home, falling in love with the house was completely fine.
But getting emotional as a real estate investor could lead you to make poor investment decisions, like overpaying for a property.
Remember, the less you pay for a real estate property, the better the odds that you’ll earn a higher profit from it. Think of your investment as a business and don't let your emotions take the lead.
Found that perfect investment property?
Before you buy, don't skip this next, and probably most important, step:
Analyze the property's potential return on investment (profitability).
The factors that can determine a real estate investment's profitability are:
- Rental income
- Rental expenses
- Cash flow
- Occupancy and vacancy rates
- Cap rate
- Cash on cash return
Want a simple formula? Real estate investor David Green recommends the 1% rule: if a property can rent for 1% of the purchase price each month, it is highly likely to be profitable and cash-flow positive.
Bring In the Pros
If you consider real estate investing to be a business (which it is), then you're going to want to surround yourself with other business professionals who can help you succeed.
Owning an investment property requires more than just the financial ability to come up with a down payment. Start building relationships with professionals who will be active partners, especially if you're buying properties out of your immediate area.
- Real estate agents
- Accountants/ financial advisors
- Insurance professionals
- Property managers
- Handymen/ repairmen
Real estate investing, like any other investment, is risky. But if you choose the right property, market, and professionals to help you along the way, it could be a smart choice to build cash-flow, equity, and profit for your future.