Historically, real estate has been viewed as a lucrative, long-term investment strategy. With that said, here are some important guidelines to help you make the right decisions when investing in real estate.
Utilize what you know
Your chance for success will increase if you focus on what you are already familiar with, such as apartments, single-family homes, fixer-uppers, foreclosures or condominiums. That way you avoid the costly mistakes that come from a lack of experience. For first-timers, start small. A single-family home is your best bet. Overtime, you can slowly expand into other areas once you establish a solid foundation.
Consult an Accountant
Before you make an investment, consult an accountant. They are experts at helping you analyze the property’s income potential. Their assistance will also be important after you make the investment to keep you on track to success.
Examine the Costs
Before you invest, calculate the property’s liabilities and assets. How much rental income can you expect? Also consider the condition of the property and determine if any major repairs are needed, the amount of r outine maintenance required and a conservative buffer for vacancies and unanticipated problems. Keep in mind that rental properties often require more maintenance than an owner-occupied home. What are the other operating expenses: taxes, loan payments, insurance? If the property’s total cash outlay exceeds its income, you need to reconsider the purchase.
Examine Property Values vs. Rent
Use the sale prices of comparable properties in the area to determine if the asking price is in line with the market. Also analyze the rental income. It can give you insight into the property’s worth. How does it compare with similar properties? If rents are significantly lower, you need to investigate carefully. If it is because the owner was not proactive about increases, analyze how much you can reasonably expect to raise them and how easily it would be to find new tenants at a higher rent.
Be Aware of Changing Tax Laws
If a tax benefit is what is making an investment lucrative, be wary. The tax code changes every year, and what might be a benefit this year may not be available next year. Don’t hinge your real estate investment on current tax laws. Instead, look for the right property with the right financing.
Inspect the Property
Always thoroughly inspect the property before buying. An inspection will uncover any potential pitfalls that could turn an investment into a money pit, such as foundation problems, roofing issues and mechanical repairs as well as minor repairs. Because of the significance of the financial outlay, hiring a professional inspector is recommended.
Examine the Tenant Circumstances
How long have the tenants lived there? Was there a recent rent increase? Are they considering moving? Is there a surplus of vacant rental units in the area? How long would it take to find a new tenant? Don’t forget to collect the tenants’ security deposits from the seller at closing.
Assess the Tax Circumstances
There are many tax breaks available to r eal estate investors. Consult a tax advisor for assistance. They can often help make the difference between a positive cash flow and a negative one.
What type of insurance does the property currently have? Is it based on actual cash value or replacement cost? How will the purchase price affect the premium? Keep in mind that it might go up if you pay a higher purchase price.
Verify the utility costs with the local utility companies. Are renters responsible for these? If not, make sure to factor these costs into your financial analysis.