Investing in property continues to be a popular way to invest. Owning a property provides ongoing income for years even in a market downturn. But investing in real estate isn’t exactly like investing in the stock market. There’s much more involved and if you go into it unprepared, you’re only setting yourself up for failure.
If you’re thinking of investing in property, there are several things you should know first. Here are key issues to consider first before making the leap towards this investment path.
Your Financial Goals
The clearer your financial goals the better off you’ll be long term. A common mistake that beginner property investors make is they often don’t have an idea of what they want to achieve financially. The general goal might be to make a passive income or be able to quit their job. But often they haven’t actually calculated exact amounts needed to reach those goals.
Start by creating a real estate business plan. It doesn’t need to be that complicated as you can expand on it later. If your goal is to earn enough to quit your job, look at what you earn now and make that your financial goal. Having a goal will give you a better idea of what to aim for as you dive deeper into property investments.
Your Financing Options
Unless you have the available funds to purchase your first rental property in cash, you’ll need to pull out a loan to finance your investment. How much you can borrow largely depends on factors like your credit score, credit history, debt-to-income ratio, and more.
Lenders use this information to calculate how much they can give you. You’ll want to know how much you can get a loan for before you start looking at investment properties. If you’re not sure about your financing options, speaking with a mortgage broker can help.
Your Down Payment
It's a common misconception that property investors need to have a full 20% down payment. But it’s entirely possible to have as little as 5% plus any costs associated with the property.
Of course, the more you have saved the better as a 20% down payment definitely works in your favor. If another investor only has 10% but you have 20%, you’ll have a much stronger advantage in terms of securing the deal. Having a larger deposit also makes lenders more confident in approving your loan.
When investing in a property, you’re obviously looking to earn a return. But as the new property owner you’ll have recurring expenses such as property taxes and insurance. You’ll also need to set aside additional funds to pay for any major repairs. Be sure to also factor in other costs like hiring a locksmith to secure the property for your new tenants.
Before investing in a property, you should have a general idea of what the annual expenses are. That way you’ll be able to calculate your actual yearly return.
Where you buy a property has a major impact on how much you can expect to earn. Buying in a rural area might be cheap but you could have a hard time finding tenants. Likewise, it’s possible you may not be able to buy in a busy city because of the costs involved.
So you’ll need to calculate profitability for different areas. One way to do this is to conduct a real estate market analysis where you look at recently sold properties and the going rates for rent. With this information you’ll be able to make better informed decisions and determine whether certain areas are worth investing in.
Your Investment Strategy
Earning income through rent is a common way to make money on an investment property. Another involves buying a home, renovating it to increase its value then selling for a profit. Other investors simply choose to buy and hold for future capital growth, and sell when the market is more favourable.
Which strategy you choose is ultimately up to you. You might even consider a mix of several investment strategies to maximise your income. For example, you could renovate an old property and then either rent at a higher rate or sell when the market goes up.
Investing in property can be a wildly profitable venture but it definitely pays to be prepared. Take the time to carefully consider these issues and you’ll be in a far better position as a result.
Alex Morrison has worked with a range of businesses giving him an in depth understanding of many different industries including home improvement, financial support and health care.