Buying a rental property is an effective way to build wealth. It generates money in two different streams – the money you earn as a rental income and the return you earn after selling the property after a couple of years when the prices hike.
Note that your real wealth is not the rent you earn but the capital gain. However, there are a lot of things to do before investing in the property. If you are a novice, it can be overwhelming to invest in rental property.
You may not be aware of where to start from. Make sure that you carefully ponder over it before blocking your money because it can be impossible to release your money if you invest in the wrong property. You should do proper research and get guidance from someone who is ace at it.
This will help you get an insight into what you want and how you can get it off the ground. Here are a few factors to consider before purchasing an investment property.
Location matters most when it comes to investing in a rental property. For instance, it does not make sense to invest in a vacation house if it is situated at a place that people do not often visit. Likewise, if you are investing in a residential property, you need to check your surroundings. It must not be at the outskirts.
The place must be blessed with all amenities, including shopping complexes, malls, educational institutes, public transport, and the like. If you rent your house, people will consider all of these factors to make up their minds.
Remember that choosing the right property in the wrong location is not right at all. This is why you should do proper research. Understand your clients you are targeting and decide on the location that will attract your clients. If it is situated in an appealing location, a large number of people will be interested in renting your property.
Make sure that your personal likes and dislikes do not come in the way. Investment is not about emotions. It is about finances. While buying a house, people decide based on their individual preferences, but it actually requires you to be logical. If your emotions account for your decision, you will likely end up ruing the day.
It is the backbone undoubtedly. Down payments for buying an investment property may differ from that of the residential property. While the down payment for your residential property may vary from 5 to 10%, it can be up to 15 to 20% for your investment property.
This is because it is a kind of commercial mortgage. Getting approval for the mortgage for such property is difficult. You will have to meet all the terms and conditions of the lender. Note that apart from the down payment size, you will have a good credit score, a good amount of income, and a bearable credit utilisation ratio.
It is always recommended that you should be debt-free at the time of applying for the mortgage. If you have already a poor credit score, you should take out loans for very bad credit with direct lenders to improve your score.
If you pay down the debt on time, your credit rating will go up. Make sure that you borrow money from a reputed online lender like ForeverFinances that lends money at affordable interest rates. Your budget and property search will go simultaneously.
Sometimes you get the property at a superb location, but your budget does not support you. This is why you should keep a budget in your mind while researching your investment property. This will help you save time.
Calculate expenses and profits
Even though the property seems to generate very high amount, you need to calculate the net return to analyse whether it is propitious to invest in it. It is not just the price including your mortgage payments but other expenses that you will incur to maintain your property.
For instance, doing up charges, maintenance fees, and additional facility expenses can cost you much. It is not overstatement that your property may cost you half of the return. Do not forget to include recurring expenses like insurance and taxes.
You should also have a room for irregular expenses like fencing, flooring, plumbing, heating system, and air conditioner replacement. Once you have calculated the expenses, you need to find out the return rate. All you need to do is to deduct expenses from your returns to get the net income.
Then you need to divide this figure by the total purchase price. A rule of thumb says that as long as the return is falling between 10 to 15%, it is promising. Note that this does not include mortgage payments.
Therefore, in order to ensure that you are getting a positive cash flow, you should subtract mortgage payments from the monthly net income too. You are definitely earning a good return if you are still left with some money.
Choose your partner carefully
Various people collaborate with others to invest in property. If you are also looking to partner with somebody else, make sure that you and your partner have the same goals. Most people do it because they do not have enough money to own it outright, but you should be like-minded.
You both need to be on the same page, especially when it is about money. Ensure that both of you agree upon signing the written contract and know the implications of breaching the contract. If you are not comfortable with the thought of partnership, you should drop this idea.
Investing in property can either let you earn a good amount of money or turn it into a disastrous move. You need to be very careful before investing money because your one wrong move will ruin your money.