As we mentioned before, one of the most important things to remember when deciding whether or not an investment property is good for you is the monthly expenses. If you cannot realistically charge enough monthly rent to a potential tenant to cover your costs, there is no point in taking on the issues unless you have an ace up your sleeve. Another important thing to remember is the adage, ‘Location, location, location!’. This could be schools, shopping, or the crime rate. These factors will affect how quickly you can get tenants, how long they stay / how happy they are.

What’s going on in your area?

This may seem simple enough, but it isn’t always easy to find the right network of people to learn about what’s “in the know.” Learning as much as you can about the trends in the area is very important before investing in property. Remember, this isn’t always going to be something you buy and sell in a month. This is an investment that you will grow with, and it will grow with the surrounding area. So take some time and find out as much as possible to ensure you and your new property will be happy “here.”

How Much Do You Need VS. How much can you borrow?

We wouldn’t recommend getting yourself an investment property before you know exactly what price range you will fall into. Contact a lending specialist immediately to learn about potential loan options and what interest rates you can obtain. You may also want to look into many properties you cannot afford now. This can be a momentum killer, so we advise speaking with a lender immediately to find out where to begin (and focus) your search.

Avoid Rentals That Need Too Much Work

Some pride themselves on being unofficial handymen who can accomplish even the most challenging home improvement tasks, while others want nothing to do with it. It is important to realize that this is a long race when beginning your journey in real estate investment. It is important, just like when running, to pace yourself and use every bit of energy ($) to benefit your end goal best. In this case, it is to get the money circulating, getting money moving in and out (mostly in, right?). So, find a property that won’t require “core” work, such as plumbing/pipes, electrical, or structural/foundation.

Who Will Be Living There?

Unless you’re planning on using the well-known “house hack” of living in the property for one year to obtain easier loan/interest rates (which is also a great way to learn what issues the property may have), it will be very important to envision what you’d consider the ideal tenant. Or better yet, what area or home is considered the perfect tenant? If the surrounding area is low income and you sink a ton of money into your rental property to make it look like it belongs in a kingdom, the funds will not return to your pocket as they should, trust us. So, allow you research and insight to help you judge who would be the perfect tenant and use this information to guide you in your house picking and renovating.

Expenses vs Earnings

Right alongside choosing who will be living in your new investment property, it is important to understand what you can expect regarding earnings from the property. If the property you’re purchasing currently has tenants, ask the current owner for a history of payments so that you can look over and see how steady (or unsteady) it seems. If the previous owner has occupied the property, understanding what is happening around it would be a good idea. You can research what homes are selling for around the area and even what some rent. Also, things like “Free Deposit” and “First Month Free” seem good in theory but, ultimately, represent a landlord/management company’s lack of ability to find or keep tenants; this could be a big red flag for you and your investment ideals.

Also, don’t forget that it is safe to assume that more than 50% of your income generated by the property will be used for the property. If your loan is $900 a month and you plan on renting the property for $2000 a month, that would leave you with $1100/month. This amount would go towards vacancy (when it isn’t being rented), utilities not covered by the tenant, maintenance costs, property management costs (if applicable), taxes, insurance, and much more. Your investment may only bring in an additional $200/month when all is said and done, but this represents a huge success and the steps of something much bigger.

Appreciation

Your investment property must bring cash flow and money into your pocket. Otherwise, what is the point? Appreciation is very important; however, it shouldn’t be used to overshadow what makes money. Force appreciation is when you can upgrade a property and increase its value in the market, thus increasing your equity or financial gain from the property. Market appreciation is when the surrounding area rises or falls in value, and as a result, your property is affected. Learning how these factors can play a role in your bottom line over time is important, so take a little time to research more and more!

Return and Capitalization Rate(s)

Cash-on-Cash return rate refers to the percentage of your investment you get back annually. So, if you have $100,000 invested in a property that makes you $10,000 annually, your cash-on-cash return rate is 10%. It is said that 10% is the baseline for what is considered “good” in the investment community, however there have been situations of cash-on-cash returns reaching as high as 25% or more. Don’t forget that just because you can get a high cash-on-cash return rate doesn’t mean the property is in the shape needed for renting. Make sure you consider all the facts before making a decision.

Now, you make about $5000 annually after paying all expenses from your investment property. Remember, this fake property cost you $100,000. This would mean that your Capitalization Rate (or cap rate) is 5%, and it would take you roughly 20 years to get back the original $100,000 you’ve spent. Increasing your cap rate means you get your money back quickly.

We hope that when you consider all of these factors, you can make educated decisions when selecting your next investment property. However, if you ever have questions or would like the guidance of a professional property management company, Buckeye Northwest Realty is here to help. Contact us today to discover how we can help make your investment dreams come true!