Getting into real estate investing can be a fantastic way to generate passive cash flow. However, you have to acquire the best, most profitable properties so you make plenty of money.
Follow the property selection tips below and you’ll be on your way to generating solid income with your first single-family rental property.
Be Wary of Fixer-Uppers
There’s a time in real estate investing for purchasing a below-market-value investment property, fixing it up, and either renting or flipping it. However, buying a fixer-upper when you’re a new real estate investor is fraught with risks, especially if you do it on your own.
Many experienced real estate investors advise that you avoid single-family home rentals that require major repairs. For example, if the house needs major foundation work, a new roof, and electrical work, you’re looking at tens of thousands of dollars just to make it habitable.
That’s a huge project for someone who is just getting started in the business. You’re better off spending more money on a rental property that needs only cosmetic work to make it turn a profit.
For example, if you look at a residence that calls for an interior and exterior paint job and new flooring to be suitable to rent, that would be a doable first project for a new investor. You might even be able to do the work yourself if you are handy around the home.
If you spend less money and time on repairs for your first house, you may even be able to call in an experienced project manager to handle tenant screening and property maintenance. Your manager will ensure the premises continue to make money.
Meanwhile, you can focus on finding new properties and expanding your acquisitions.
It’s worthwhile when you start purchasing rental properties to learn as much as you can about the local market. A great first step is to attend local real estate investor meetings.
If you don’t know where they are, check out Meetup.com for your city. Real estate investor meetings are likely to be listed there. Biggerpockets.com also lists many real estate investor groups in every major city in the U.S.
You’d be smart to pick the brains of more experienced investors in your community. At the very least you will learn where to buy and not buy.
You’re more likely to avoid purchasing bad real estate in sketchy neighborhoods if you learn from people who have been in the business before you.
Finance or Cash?
This is an age-old question about which many real estate investors may offer an opinion. There is no right answer.
Some say you should never buy a rental property unless you’re prepared to pay all cash; others recommend getting a mortgage because leverage increases your cash-on-cash (CoC) return.
Let’s say you buy a rental property with cash for $100,000. The property gives you $1,000 a month in rent after you cover every expense.
After taxes, you would earn $9500 per year and the total return is 9.5%. That’s a perfectly respectable return.
However, what if you bought the house with an 80% mortgage and 20% down? After you deducted all the expenses and interest costs, you would earn about $5500 per year. That’s less money, but the CoC return would be almost 28%!
Plus, you could pay down the principal a little with every mortgage payment. This is what real estate investors mean when they speak of leverage.
Is buying the property with cash best for you, or is a mortgage preferable? That will depend on your investment goals, risk tolerance, and other factors.
If you keep these ideas in the back of your head as you ponder your first rental property purchase, you’re more likely to make money and expand your little nest egg into a larger one.