Whether you’re considering purchasing a multi unit complex for immediate rental, buying a home now with the idea of selling it a few years or profiting from the purchase of a fixer-upper that can be resold at a much higher price, here’s what to look for when considering real estate as an investment:
Plan on a big down payment. Mortgage insurance isn’t available for investment properties, so a 20 percent down payment is required to get traditional financing. And putting even more down can result in a better rate. Also, loan costs are generally higher for investment properties.
Enjoy being handy and fixing things. Opting for the landlord route brings with it lots of challenges, including making repairs. Be sure to have enough savings on hand to handle any unexpected repairs in the short term – before the rent checks start rolling in.
Income varies. Tenants come and go, and it may take a while to rent out a just-vacated unit – especially if it needs substantial repairs or rehabbing, reducing your income. But you’ll still have to pay the bills, including mortgage, property taxes and insurance.
Property taxes. Depending on the type of rental property purchased and how long it is kept, investors could discover a big increase in property taxes, if a homestead exemption had been in place for the previous owners.
Beware of fixer-uppers. If you’re new to investing in real estate, beware of taking on a bigger challenge than you can handle. Unless you have the skills for large-scale improvement – or know someone who does quality work at bargain prices – you’ll likely pay too much to rehabilitate the property and still make a profit on its sale.
A better option is to look for properties that need modest repairs that are priced at below-market rates. Start small. While repairs present a challenge, so can buying a larger property than you’re ready to handle. Starting small purchasing a single apartment, condo or duplex, for example – can help you get grounded in the idea of investing in real estate and decide whether it’s really the right step for you.
Choose your partners wisely. If you can’t afford to buy property on your own and wish to enlist co-investors, be sure you’re comfortable not only with your business partner but the agreement struck up to purchase and manage the investment.
Consider a REIT. If the day-to-day challenges of buying and managing a rental sound too burdensome, there’s still a way to benefit from investing in real estate: real estate investment trusts. REITs are privately or publicly held companies that use investors’ money to buy and lease real estate. REITs are easy to purchase – just open a brokerage account – and they yield many of the same benefits of actually owning real estate, such as routine income (in the form of quarterly dividends), and they typically offer better and more reliable returns.