Real estate can be a good investment if you choose wisely. It is important to take a systematic approach to making your first purchase. If you dive in without doing your research, you are unlikely to make a profit, so follow these five steps to be prepared.
1. Make Sure You Are Ready to Be a Landlord
Choosing to invest in real estate isn’t just about whether you can make money doing it. Real estate investment is a long-term commitment, and being a landlord isn’t for everyone. In addition to buying the right property, you need to be prepared to do the work to get the property ready for rental, find tenants, take care of maintenance issues, deal with late payments, and in the worst-case scenario, handle evictions. You’ll also need to choose a business structure. There are several options, but an LLC is the easiest and most inexpensive to establish. This process also involves establishing your business with the state, so check your state-specific requirements or use a formation service to ensure everything is handled properly. If all of that sounds unappealing to you, real estate investment might not be the way to go.
2. Determine Whether You Should Pay Cash or Finance
How to pay for your investment properties depends on your investing goals. Paying cash may be a good option if you are focused on increasing monthly cash flow. Financing may result in less cash flow but a greater return over the life of the investment.
3. Pick the Right Location
Look for a property that is for sale in an up-and-coming area. If you purchase in a neighborhood that is already hot, you will probably pay a high price for your purchase and have a hard time making a profit. If the neighborhood is on the decline, the home may lose value and you may have difficulty renting it for enough money to cover your costs.
Additionally, choose a location with increasing demand for rental property. Areas to consider include popular vacation destinations, locations near colleges, and places that attract young professionals.
4. Choose the Right Property
There are many factors to consider when choosing an investment property. Two of the biggest are how much it will cost to purchase, maintain the property and get it ready to be rented and how much you can expect to rent it for. According to industry data reported by SF Gate, the average rental price for a one-bedroom in San Francisco is $2,390. Look for a property that is likely to generate an average or better return, which is challenging in this area because the median sale price is over $1.5 million.
If you are looking for a property on a budget, consider buying a home being sold “as-is.” You can usually get a lower price in exchange for needing to do some repairs to get the property in rentable condition. Make sure you inspect the property carefully. Talk to a lawyer, study the land records and watch for any red flags that may indicate you should avoid the purchase.
When you’re ready to list your property, contract with a local photographer to get the best pictures. Your listing – and the photographs you feature – will go a long way in convincing people to view your property, so consider a real estate photographer a crucial aspect of your marketing plan.
5. Decide Whether to Hire a Property Manager
Hiring a property manager can take a lot of the work out of investing in real estate. The downside is that it will reduce your profits. Expect to pay about 8% to 12% of your collected rents for a typical property manager. However, if you hope to build a portfolio of investment properties, a property manager may be essential, because you are unlikely to have the time to manage multiple properties on your own.
There are many decisions to make when purchasing your first real estate investment property. Rushing into a purchase may cost you in the long run. It is better to put the effort in upfront so you have the understanding needed to turn a profit.
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