One of the most effective ways to build wealth is to invest in real estate that you can make money off of every month for the rest of your life.
Of course this is not a new strategy, as it’s something that millionaires, business moguls and everyday people do to create financial freedom. And while there are a lot of people who make big bucks off of rental properties, there are also many who end up making bad investments.
Do you want to avoid being one of the individuals who loses money trying to make more? Then look at the tips below and they’ll help you make better decisions when purchasing a rental property.
1. Assemble Your Team of Experts
Buying an investment property has a lot of moving parts to it. It takes a considerate amount of planning and calculations. You will need to have good, trusted conversations with professionals who are going to be involved.
After getting the green light from the bank, you will need to find a great real estate agent. Be careful about picking them randomly. Make sure you ask around who specializes in working with investors as it takes a whole different kind of experience to be able to find a great deal vs. just a nice family home down the street.
2. Take Your Time
Everyone wants to become wealthy overnight, and this leads to many people making hasty decisions that cost them more money in the long run. RELAX! It’s always best to make a long-term investment that you can hold on to rather than a short-term risk. While you might make money in the short run, there’s a bigger chance that you’re going to lose it.
Tip: Get rich schemes are everywhere these days, and it’s important to watch out for them. Be careful with your investments and look out for salesmen that tell you “you could be the lucky one”. If it sounds too good to be true, it is probably too good to be true.
3. Consider the Details
Any good investor will tell you the details are the most important parts of an investment property. Here are some things you should consider of a condo, house, a townhouse or any other property you’re thinking about purchasing to rent out to others.
– Location – Is it safe? Are there schools nearby? Is the crime rate low? Is there a grocery store or retail shopping nearby?
– Repairs/Maintenance – You should anticipate costs for new paint and changing locks, but major repairs might not be in your budget. Have the property inspected so you know what shape it’s truly in.
– Appearance – Spend a little time sprucing the property up to make it look nice. Just a little bit of work can get your place off the market to good renters.
4. Positive Cash Flow
Too many investors purchase rental properties that end up costing them money each month rather than making them money. While you will end up making a lot more when the property is paid off, do you really want to wait that long? When you look at properties, make sure you’ll have positive cash flow after all expenses are paid. Imagine this scenario for a 1-bedroom investment apartment:
Rent Collected – $1300
Insurance – $100
If you subtract the mortgage and insurance costs from the rent you’re collecting, you’re still making $400 every month. Have a few of these money generating machines going and you’ll be well off by the time you hit retirement.
5. Percent of Purchase Price Assessment
Last, but not least, do a quick assessment to see what percent of the purchase price you’ll be paying off in rent. Do this by taking the estimated rent you’ll get every month and dividing it by the price you’ll pay for the home. If you end up with .8 or higher, then you’re probably making a good deal. If you’re below that, you might want to re-consider.
As an example, if you are receiving $1,400 each month from your tenants and paid $175,000 for the property then you are receiving 0.8% of the purchase price as monthly rent.
You will want to make more detailed calculations before making any big decision, but this is a very quick approach for you to sift out the properties that aren’t going to work.