The whole idea behind investing in real estate is to make some cash. Obviously. But there are things you can do to reap the most rewards from your investments.
Real estate has long been a sound way to collect some cash through investment, even long after we can or want to work. It’s a great way to accumulate enough money to compensate for inflation and taxes that can quickly and easily eat away at our savings. Even in a crappy economy, real estate tends to do a lot better than stocks. It’ll still appreciate over the long haul, and has proven to be the best way to accumulate wealth.
The best part? You don’t need a Master’s degree or decades of experience to make it big with a real estate investment.
Scope Out a Number of Properties
It might be tempting, but it’s important not to jump at the first property that you see. This is especially true for the newbie investor. Instead, you should ideally check out a few properties and compare each. Sure, it takes more time and work to look around, but it’ll all be worth it in the end to avoid money pits and land the real gem in the pack.
Keep in mind that you won’t be living there, so don’t base your decision on what you specifically would want in a residence. Think about what renters are actually looking for, and give yourself a spectrum of options before narrowing them down based on a set of requirements you’ve set from the get-go.
Look For Properties That Make the Most Financial Sense
Be realistic about the financials when you’re looking for an investment property. Not only should you be looking at what you can afford to buy, but you should also consider how much residual income each property can bring in for you every month. Conducting a thorough financial analysis is critical here.
Do the number crunching, and identify important figures such as income versus expenses (net income), cash flow, capitalization rate, return on investment, and net income versus purchase price. Get some help from a financial advisor or real estate agent to help you determine these figures and make sense of them.
After you’ve become acquainted with these numbers, you’ll have a solid base to help you decide if a specific property matches your criteria and financial goals. If you’ll wind up with a negative cash flow on a specific property after performing these calculations, keep looking.
Look in the Right Neighborhoods
The type of area that you buy in will heavily influence not only how well your property will appreciate over time, but also the kind of tenants that the property attracts and the number of vacancies you experience. It can be tough to decipher what will happen to a specific area over the years, but there are ways to tell how healthy it is today, and will be at least into the near future.
How close is the area to the downtown core and amenities? What are the school ratings like? Are there new developments taking place at present or in the near future? How well do area residents take care of their properties? Are there lots of vacancies? What is the crime rate like? And what about the job market? The answers to these questions will give you a solid idea of how healthy the neighborhood is, and if it’s worthy of your hard-earned dollar.
Take Advantage of Allowable Tax Deductions
You can really save a boat-load cash if you’re smart about what you can write off on your investment property. When Uncle Sam comes knocking, make sure you tap into any one of the following tax deductions (where applicable):
• Interest – This includes mortgage interest payments and interest on credit cards for items or services used for rental activity.
• Depreciation – You can get back the cost of your property through depreciation and deducting part of the property’s cost over a number of years.
• Repairs – You can claim the entire cost to renovate the property in the year that this activity occurred.
• Employees and contractors – Any time that you need to hire someone to take care of your investment property, you can write off the expense.
• Theft and loss – If your investment property is ever damaged or destroyed, you might be able to get a tax deduction for all or part of the loss. The amount you can deduct will depend on how much of your property was destroyed, and how much of it is covered through insurance.
• Insurance – Speaking of which, you can deduct the premiums for just about any insurance for rental activity, including fire, theft, flood, and landlord liability insurance.
Snag Ideal Tenants
You want good tenants to occupy your property. Tenants that pay on time every month, take care of the property, don’t complain, and aren’t a nuisance are the ones you’re looking for. And when you find those tenants, you want to keep them. It’ll make your life as a landlord a lot easier and less stressful.
But you play a part in how your tenants behave, too. A happy tenant is less likely to be a bother. So make sure the property you’re offering is in good shape, and is well taken care of. Offer them a competitive rent price, and don’t nickel and dime them on it. Trying to make an extra $100 a month from rent isn’t worth it over the long haul if it winds up leading to a frequent turnover rate.
Use a Property Management Service
Managing an income property involves a lot more work than you might think. And if you’ve got more than one property, it can essentially turn into a full-time job. Sure, you need to pay these professionals, but it’ll save you a great deal of time and headaches. They’ll deal with the maintenance of the property, finding tenants, collecting rent, and so forth.
Fees for this service tend to range around 5 to 10 percent of your rental income, which really isn’t much in the grand scheme of things. For instance, if you collect $1,500 a month and the management fee is 6.5 percent, that’s less than 100 bucks a month to get a skilled professional to deal with everything on your behalf. A good investment isn’t entirely about maximizing your income; it’s also about maximizing time and energy saved.
The Bottom Line
Every city across the country has good neighborhoods, and each neighborhood has good properties that are ideal for investments. But a little legwork and know-how are needed to make sure you find the right property and make it work to its highest and best use. Make sure your expectations are realistic and that your finances are good enough to allow you to wait a little while for your investment property to start generating a healthy cash flow instead of desperately needing the money. And of course, team up with the right people to help make sure your investment is as solid as they come.