Owning real estate is one of the best investments you can make. Simply owning a home gives you the opportunity to build wealth. But buying an investment property can earn you passive income.
Want to learn how you can start living free off of passive investment property income? Then you better keep reading because this one’s for you!
1. Make Sure You Know What You’re Getting Into
If you clicked on this article, odds are you’ve done your research on real estate investments. But for those of you who haven’t, consider this: an investment property isn’t a surefire way to turn a profit.
There’s no guarantee that someone will want to rent your property. And if you’re forced to sit on the home, you’ll end up paying more for your investment than you’re getting in returns.
If you want to make money fast, you’ll need to place your cash in a liquid asset. Real estate is highly illiquid compared to stocks, bonds, and high-interest rate savings accounts.
Plus, unlike stocks and other investment vehicles, investment properties actually cost you money. You have to cover the home’s expenses. This includes:
- Annual property taxes
- Costs to maintain the home if, for instance, the roof gets damaged
- Monthly utilities
- Property management fees
The cash-on-cash return of another type of investment may be better than the ROI from an investment property. But here’s the good news: real estate is one of the easiest investments for which you can calculate returns accurately.
When you’re running the numbers on a potential property, consider whether an investment property is the best place to put your money. If not, consider one of the other investment vehicles we mentioned above.
2. Focus on Location, Location, Location
You may already know that location is important in real estate. But do you really understand how critical it is to find the right home in the right neighborhood?
Understanding the importance of location is the difference between your investment property getting rented out immediately and you having to sit on the property and incurring pricey expenses.
And that’s not the only thing. Some locations will attract more quality tenants than others and, more importantly, demand higher rents. The location of your rental property investment determines the vacancy rate, which is another factor in how much you can charge for rent.
So, where should you look for your rental properties? A good investment property is in a pre-established community. The best investment properties are in established communities that everyone wants to move to.
Homes in neighborhoods with walking access to schools, jobs, and public transportation are good targets. So, too, are properties near parks and shopping and eating centers.
Before you sign the purchase agreement, make sure you check out the local crime level. Online platforms like Zillow will usually give you access to these reports. Otherwise, get in touch with local law enforcement to learn about the area’s crime level.
If you plan to own multiple properties in a high-crime area, there are solutions to support you. You can hire officers to patrol your properties. Using a product like Patrol Points, you can cut costs on much-needed property security.
3. Know the Difference Between Flips and Investment Properties
Think the only difference between a flip and a rental property investment is that the former go up for sale while the latter are rented? Think again. Buying an investment home requires you to go into your search with a different mindset compared to finding properties to flip.
When you’re searching for a home to flip, it’s sometimes a calculated risk to buy the best house on the block. Flippers also look for homes they get for mere pennies, but these properties require months, if not years, of work.
Investment properties should be different. You want to find the home in the best shape possible for the lowest price available. That way, you can rent it out fast and with as little work as possible.
Don’t get too attached to the fact that there’s no walk-in shower and the floors are all laminate. After all, you’re buying the home to rent out to tenants, not to live in yourself.
4. Identify Expensive Components That Need Replacing
When you walk up to a home, you can see if it needs repairing. But when it comes to more expensive items, you may not be able to determine quality by just looking.
Household components like water heaters, AC units, furnaces, and roofs are expensive to replace but tend to last a long time. But it’s not always clear from a walk-through what condition they’re in.
This is why you should always ask the seller for the age of these four components. The best answer is one supported by documentation. If a seller can’t give you an answer or support it with records, call a home inspector.
You should order a home inspection for any house you intend to purchase. But this is even more important for investment properties. You don’t want unexpected repairs creeping up on you and cutting into your bottom line.
The home inspector can give you a general estimate of how old the home’s roofing and HVAC system are. Roofing should last up to 25 years, depending on inclement weather. And HVAC systems should last 20+ years as long as filters are changed monthly.
5. Figure Out How Much You’ll Pay in Taxes
As we’ve mentioned, property taxes are one of the most considerable expenses of owning a home. That’s why you should always figure out how much you’ll pay in property taxes once you purchase the home.
And here’s the thing about property taxes: some states and cities will change the property tax bill upon a transfer of ownership. If the home is valued much lower than it’s actually worth, you can end up paying double the property taxes. Yikes.
Here’s an easy fix for finding out if you’ll have to pay more in property taxes. If the tax assessment is lower than the price you paid for the home, you can calculate the real value of your home. Simply search online for the property tax rates in your area and multiply that by the price you paid for the home.
Another tax to consider is the tax new homeowners must pay their jurisdiction to transfer the property deed into your name. This is called a transfer tax.
For example, California charges a transfer tax of 0.11%. Meanwhile, New York County charges up to a 1.4% transfer tax and New York City can charge real estate buyers up to a whopping 2.625% in transfer taxes.
There is good news, though. You and the property seller can negotiate who pays for transfer taxes. The more bargaining power you have, the more likely you are to get the seller to cover these taxes.
6. Hire a Property Manager
Someone needs to manage your investment property. Managing it yourself is the best way to cut costs and get experience.
In fact, many seasoned rental property investors highly recommend self-managing your first home. You’ll be forced to learn what tenants want in a home. That will make you an even better investment property buyer the second time around.
If it’s not going to be you managing your rental homes, your best bet is to hire a property management company. Alternatively, you can hire an individual property manager, but this presents risks.
Individual property managers may not have the experience and professionalism you require. You’ll have to vet out multiple candidates, which will cost you both time and money.
The better choice is to go with a seasoned property management firm, especially if you own or plan to own multiple properties. Property management companies offer inexpensive services. Plus, they have the expertise to give you peace of mind about who’s running your real estate investments.
7. Identify Your Competitive Advantage
For every business venture, you should be able to identify your competitive advantage. In other words, what sets you apart from other competitors in your space. Investment properties are no different.
Is your competitive advantage that you can buy in cash? Then you’ll have the benefits of not needing a loan. You also won’t have to pay interest on that loan.
Or maybe what sets you apart is your ability to find homes no one else has access to. For example, some property investors approach homeowners directly about selling their homes. This can get you access to properties that aren’t even on the market.
Can you do all the renovation work yourself? If so, that will give you the advantage of not having to pay for labor. You won’t have to wait around for contractors and cut into your profits because you only have to pay yourself.
By now you may be wondering: what if I don’t have a competitive advantage? You may not be looking hard enough.
Even if you don’t have one of the above benefits, you can compete on being the smartest investor in the room. All you have to do is keep doing your research and keep these 7 tips in mind.
Buying an Investment Property Doesn’t Have to Be a Headache
Using these seven tips for buying an investment property, you can start turning a profit in no time.
Ready to do more research to prepare for your first purchase? Keep scrolling for more articles like this one!