Buying a rental property as your first real estate investment venture comes with great benefits. Investors find this a good source of passive and retirement income due to the asset’s ability to appreciate over time. Add to that the tax benefits as you can include every reasonable expenses such as mortgage interest, property management expenses, and maintenance costs as deductions.
However, you must know the risks, too. To start off, a real estate investment requires high cash investment for down payment and closing costs. Real estate properties are also expensive and slow to sell, making them very illiquid assets. You are also expected to have ample skills to manage this type of investment and put in a lot of work to be able to earn strong profits.
The good news is you can learn how to invest in real estate. Here are a few tips to get you started:
1. Remember that you are buying a property to rent out, and not to own.
This is very crucial because it will dictate your requirements and considerations in choosing a property. The rental property does not necessarily have to be close to your place of work, for example. The job of the property is to make you money after all. Do not make the usual mistake of gravitating towards rental properties in the standards and locations of properties you would live in personally. In fact, affordable houses appreciate more, are less vulnerable to an economic downturn, and generate more cash flow.
2. Set the price range you’re willing to work around with.
A quick Google search or your realtor can give you a price range of properties in your city. What you want to do with it is to find the median price and work around it. A good price range would be from 50% below the median price to 25% above it.
3. Compare prices.
Before going into any negotiations, it is best to do your homework first. Compare your chosen property with similar properties in the same zip code. You can do this by pulling up properties of the same square footage or the same number of bedrooms and bathrooms. Take a look at their selling prices as they will tell you, more or less, what you should be paying once negotiations start.
4. Be patient and do not get attached.
Emotion has no place in any kind of investment. Most first-time real estate investors get emotionally attached to the first property they get attracted to. Keep in mind that this endeavor entails reviewing dozens of properties before finding the right deal. Before getting into real estate investment, embrace this reality first so you don’t risk wasting your hard-earned money and precious time in a failed investment attempt.
5. Prepare to negotiate and even walk away.
Remember that the prices are not set in stone. If you are going to negotiate, make sure that you know your numbers and you back up your offer with facts and statistics, which is why it’s important to do items #2 and #3 above. It is also important to do your research on the seller. Details as to how urgently they need the property sold and why they’re selling are very helpful details to take note of. Set a ceiling price that you are willing to pay. Commit to it, and if after numerous back and forth, they are still unwilling to accept, don’t be afraid to walk away.
6. Before making any offers, make sure financing is in place.
Arrange your financing first before throwing around offers. Sellers expect to know how you’re paying for the property. Your options will depend on whether you are looking for a purchase-rehab loan or a long-term rental property mortgage. As for the amount you’ll be needing, get the numbers right. Make sure you take into account all the expenses that come with the real estate investment: downpayment, closing costs, repairs, and reserves.