The pandemic highlighted the importance of having a secondary source of income. This is particularly true among employees who lost their jobs since their companies filed for bankruptcy due to the health crisis. One way people can get an extra source of funds is through real estate, specifically rental properties.
A rental property is a home that an investor purchases and is inhabited by a tenant on a rental agreement. While owning rental properties is an appealing idea, people should take a couple of things into account before investing. Here are some things that people should consider before they invest in rental properties.
Property Management Experience
Owning a rental property does not mean people should sit and wait for the money to come in. They should manage their properties sothat they can achieve their goal of earning from them. Managing the property means screening tenants, setting and collecting rent, maintaining the property, and managing the budget.
If they do not have property management experience, they can hire a person to manage the property for them. They can also look for a reputable property management company that can handle their property. This is particularly true if investors already have more than two properties since it may not be easy to manage these properties.
Personal Debt
Another thing that property investors should consider is their debt. A long-time investor may include their debt in their investment strategy. But new investors may need to think twice before they start acquiring rental properties. With the average personal debt of Americans standing at around $90,000, it’s advisable to work on it first.
Property investors should check if the return from their real estate investment is bigger than the cost of acquiring additional debt. They should not put themselves in a position where they cannot make any payments for their debt. It’s best for them to always leave a margin of safety when budgeting their finances.
Down Payment Requirement
The down payment for investment properties is higher compared to properties bought for occupancy. It can be between 15 percent to 20 percent of the total price of the property. Even if investors can get a down payment that’s lower than 20 percent, they may need to get private mortgage insurance, which means an additional payment of 0.25 percent to 2 percent of the loan balance every year. The requirements to get a loan approval are also stricter. With this, investors should prepare their finances to cover the initial cost of acquiring the property.
Financing Options
With the knowledge of the initial cost of acquiring the property, investors should now check their financing options. If they have the funds, they can consider buying the property in cash. Paying in cash allows investors to generate positive cash flow every month. A return on investment (ROI) of around eight percent is already good for many investors. But it would be better if they can get a higher ROI.
If they do not have enough cash to buy the property outright, property investors can look for a reputable mortgage broker who can help them finance their rental property. The finance professional can even help property investors find the best rates to finance their property acquisition. These professionals have experience in negotiating with banks to find the best deal for property investors.
Interest Rates
Even as the mortgage rates for owner-occupied properties went down during the pandemic, they remain high for investment properties. Due to this, property investors should check if their mortgage payments significantly affect their monthly profits. They can work with a professional to find the best deal in the market.
Property Location
The location of the property is another thing that a property investor should consider since it plays a significant role in the rental rate of the property. It’s not a good idea to invest in an already declining area since the investor will end up with a property that no one wants to rent.
Property investors should look for locations with a growing population and a revitalization plan prepared by the local government. These locations offer a considerable investment opportunity that can reap the rewards in the future.
Low property taxes and an adequate school district are good signs for a property investor. Additionally, amenities, like restaurants, malls, and parks, also point to a good location to invest in. Other factors that property investors should consider are access to public transportation, a suitable job market, and low crime rates.
Investing in rental properties requires a lot of research from the investor. They should also be realistic and make the necessary computations before committing themselves to avoid financial issues in the future.
