When it comes to investments, few can match the financial opportunities associated with real estate. For many people like yourself, purchasing rental property can be a great way to build an investment portfolio and begin to accumulate substantial wealth. But before moving forward with this decision, here are four important tips you should keep in mind before investing in that first piece of rental property.
Your Ability as a Landlord
Prior to buying rental property, stop and think about whether or not you want to be a landlord. While you could turn over the jobs of repairs, evictions, and other issues to a property management firm, this will cut into your profits substantially. Therefore, always stop to think about whether you want to be unclogging a toilet at 3 a.m. or serving eviction notices before buying your property.
A Large Down Payment
When you buy rental property, you will probably need a much larger down payment than you did when you bought your primary residence. In most cases, rather than the three percent down payment you needed for your home, you will instead need about 20% of the purchase price as a downpayment for your rental property. As to why, this is mainly due to the fact that mortgage insurance is not an option for rental properties. However, you will need to have public liability insurance on your property, so don’t forget this added expense.
Pick a Good Location
When you buy rental property, look for properties that are located in excellent areas of a community, rather than in ones that are clearly in decline. As a general rule, buy properties that are in locations that feature low property taxes, low crime rates, have excellent schools, and feature plenty of parks, stores, restaurants, and other areas where people can have plenty of fun.
Bypass the Fixer Upper
Though you’ve probably heard many stories about people who pay very little for homes that are in terrible condition, fix them up, and then flip them for a huge profit, don’t choose this path when investing in rental property. Unless you are extremely skilled in home improvements, you will wind up spending much too money on the property. Instead, find a home that only needs a few basic repairs and is priced a bit below market value.
By following these tips and always using common sense and good judgement when making your purchases, you will be on your way to becoming a real estate tycoon.