Are you thinking of buying a house as an investment? When you have enough money, investing in real estate is indeed a stable and excellent investment. We learned that stocks are very volatile during the last financial crisis, while rental income from real estate will always stay.
The following tips will help you get the maximum return from your home and, at the same time, make a good investment!
1) Is It Really Right for You?
Real estate investment is not only about earning rental income. It also requires a lot of time and work. You will have to find reliable tenants, pay taxes, collect overdue rent, and do many other tasks. What if the tenant disturbs the neighborhood?
This also means that the maintenance of the house will be your responsibility. Of course, you can outsource it, but it will be deducted from your profits in that case. If you cannot afford it, you may have to do it yourself. How good are you at household chores such as unclogging toilets, repairing drywall, and connecting appliances?
If you’re not good in these areas, you may want to consider whether renting a house is right for you.
2) Pay Off Your Debts First
An intelligent investor can split the debt into different portfolios. Smaller real estate investors should avoid this.
If you have debts, it is best to pay them off first to reduce the interest burden. For example, think of student loans, other mortgages and loans. Also, consider that you may have high expenses in the future, such as medical bills or children’s education. It may not be the right time to invest your money in real estate in such a case.
On the other hand, if the return on real estate is higher than the cost of debt, you may not need to pay these debts first. However, avoid a situation where you cannot pay back the debt anymore. Always have a safety cushion.
3) Consider Interest Costs and Taxes
When taking out a mortgage or extra home loan, keep in mind that you will have to pay interest. You also need to consider that you will have to pay taxes on your second home and that if you are renting a house without living in it yourself, you will not be able to deduct the interest, or your rights will be limited. These will be additional costs.
4) Calculate the Profit Margin
Large real estate investors aim for a return of 5% to 7% but have staff that must be paid a salary. A small private real estate investor could expect a return of 10%. Also, consider 1% of the property value as annual maintenance costs. Other costs include insurance premiums, property taxes, and monthly expenses.
5) Determine the Rental Rate
Calculate the return on investment. A 6% return in your first year as a landlord is considered healthy, especially if your rental income will increase.
6) Location, Location, Location
Choose a location where prospective tenants would want to live. Your rental income will probably be higher here, and you won’t have to search for suitable tenants for an extended period.
7) Have Realistic Expectations
While investment can provide you with a good income, it can also go wrong. It is also possible that you are buying the wrong property. You may want to consider investing in your first home with an experienced partner. In any case, read carefully and check the important information to avoid facing any unforeseen problems.
Tip: Buy a house in an up-and-coming neighborhood. The value of homes in these areas is often still relatively low but will rise quickly as the area becomes more popular. This is a good return.