Investing in real estate has often been declared as one of the best passive income-generating strategies. It offers financial security by helping you build up on wealth at the comfort of your home. However, investing in real estate is easier said than done since the venture usually requires a lot of money upfront. Furthermore, the ongoing talks of recession have probably discouraged many property investors.
If you are looking to be one, then this should act as a guide and help ease your journey to financial freedom.
The Basics for Homeowners
Becoming a landlord can be overwhelming for first-time homeowners. As a result, most experts recommend hiring a realtor when you are first starting out and not going through with it alone.
On the surface, a realtor’s job is to help clients buy, rent, or sell properties. However, what most people don’t realize is that they can also be an asset by advising prospective clients on market conditions, helping to find and screen potential tenants, and the great realtors understand the market and will help you get the best investment possible within your budget. And since it looks like we’re headed into a recession it would be wise not to make hasty or uninformed investments.
However, since the value of the land your investment sits on tends to naturally appreciate with time, it might present an opportunity to gain larger returns on your investment. With that in mind, have a look at some noteworthy considerations to help you get started.
Land investments are always a risk. To make the most out of it, make sure you’re always up to date with current marketing trends. For your first property refrain from buying land or property in close proximity to a busy and underdeveloped road. The main point is noise, and also the likelihood that the local government might initialize plans to expand the roads are quite high, and in the end, you may suffer the consequences if they choose to impose eminent domain.
Watch the employment trends. If there is a significant upward trend of average salary in a given area and it is developing, then the likelihood of a higher return on your investment on either rent you can demand a higher price per square foot if you choose to sell should go up in the future.
Another thing to consider is how much available land is there for developing in a given area? If it is like the downtown Scottsdale area, or San Francisco, or Manhattan there is no more area to build on. So the prospective real estate costs are going to be much higher to obtain initially but this is an indicator that the real estate resale value will continue to rise. Helping to ensure a steady return on investment.
Alternatively, an area that has plenty of space to develop in, has significant job creation for the middle class, and favorable politics towards business, can allow you to obtain property at a reasonable price and a higher resale value in a shorter period of time.
Work on a Realistic Budget
It is crucial to plan out all your expenses, including taxes, upkeep and repairs before going all out in real estate. Since it requires a lot of capital, most experts recommend starting small with a duplex or a small condo. A nice hack is to buy a duplex and rent out the other half which should cover your mortgage, freeing up capital for further investments and you have a place to live essentially for free in the meantime. As time goes by, you should be exposed to a higher income potential that should enable you to own several properties.
Paying in Cash vs. Private Mortgage Insurance
The most common mistake for those that are new to the housing market is the desire to borrow beyond their means. This happens because of private mortgage insurance, or in the industry it is truncated to the acronym of PMI. This type of insurance is required by most, if not all lenders, if your down payment is less than 20% of the sale price of the home. PMI tends to add significantly to your monthly payment, and can be equivalent to a car payment or more depending on your interest rate. To know what you can expect you can use this handy PMI calculator.
Coming up with the 20% down payment can seem like a challenge but it will typically allow you to obtain a lower interest rate and not have to pay for PMI which can save you thousands, if not hundreds of thousands, of dollars depending on the size of your loan.
Why Is Having Good Credit Important?
A person’s credit score is a reflection of their timely payments of debts and means of their extensions. Maintaining a good credit score goes a long way to help on a lot of fronts.
Most lenders will offer you a mortgage provided your overall score is mid to high and debt to income ratio is low (below 27%). Trying to obtain a mortgage with a credit score between 650-680 will usually net you a APR 1-3% higher than those in the 700s.
You can always obtain a mortgage with mediocre credit and refinance later when your credit has further improved, but if this is a first time investment it is wise to stack the odds in your favor.
Upcoming Trends: Airbnb Investments
Airbnb (and it’s equivalents) have become the norm for tourists from all over the world. Your earnings will depend on location, level of hospitality, facilities open for use, and of course, general hygiene of the place.
Most Airbnbs tend to offer the services found in five-star hotels at half the price. The best part about them is that you don’t need to wait until the end of the month to collect your pay. Each client is charged per day or within the short duration of their stay. Even at half the price, with steady bookings you can double or even triple the income you would get from renting to a single family.
The only downside to Airbnb is their seasonality. A typical occupancy rate of a busy area is between 50-60% for a total year. But if you can charge $1,200 per week vs $1,500 per month then you can still come out on top with an average of double the income by going the Airbnb route. Though this type of investing does require significantly more start up capital, since the competitive market demands a high standard of amenities. So you will need to set aside money for furniture, renovations, insurance etc.
Single-Family Home vs Condo Investing
The main driver of whether you pick a condo or single family home to invest in is location. Most single-family homes are located in suburban areas with lots of space. Whereas condos are in more densely populated city centers. Understanding what the market is in your area is going to help your decision making here.
Single family homes tend to require a greater amount of upkeep but you also can demand a higher rent. Once again buying in a developing area will help you demand a higher rent and in the future a higher sale price. Same can be said for condos.
The main difference between them will be the type of renter you wish to attract. Single families tend to be more stable and usually have a dual income and will want to occupy the property longer than a one bedroom condo. Really the decisions and market aspects to assess here are:
- Is the area up and coming/developing?
- What is going to be the property upkeep costs?
- Is it a buyers or a sellers market?
- How much open land is available in the area?
- How desirable is the area for prospective renters?
When investing in real estate. Take it slow, do your research, and make sure that you have all of your ducks in a row. This will likely be your first big investment and an informed investor is a prepared investor.