There’s no reason amateur real estate investors can’t profit from small, individual property purchases. As home values currently rising 3.9 percent year-over-year, and expected to rise another 2.6 percent over the next year, why not allocate some of your savings toward real estate? To get started off on the right foot, you’ll need to make some decisions. Follow these steps prior to entering the real estate market.
Evaluate your Current Finances
In general, experts advise buyers put down at least 20 percent of a home’s purchase price. But to avoid being responsible for two mortgages, many investors wait until they can pay for real estate outright.
If you do need a mortgage, you might consider living in your investment property to take advantage of owner-occupant rates. You don’t have to live there forever, either. Lenders typically require just one year of residency to lock in the lower rate for the remainder of the mortgage. Owner-occupied interest rates are much more favorable than secondary home or rental property loans.
For those fortunate enough to purchase multiple income properties simultaneously, it’s important to choose the right financing. Experts recommend that an individual can leverage his investment capital using cheap 30-year fixed-rate mortgages and buy as many income-producing properties as possible. This is how you can accelerate your wealth-building with the turnkey properties.
Determine the potential Cash Flow
House flipping (means purchasing a property and then quickly reselling it) can help you make quick profits that look easy. But most homeowners don’t profit when they sell shortly after closing. Of course, extensive renovation on a flipped home increases the potential for short-term profit, but bigger upgrades costs a lot of money. Unless you’re capable or experienced in large-scale home improvements, don’t assume you can flip a house by yourself to benefit immediately.
Renting out the property, on the other hand, is more of a long-term strategy. Pricing requires some serious calculations to attract the largest number of possible tenants, while still covering the mortgage and homeownership costs. Although you’ll aim for profit in the beginning, the real money usually flows in after the mortgage is paid.
Experts suggests that in order to compute your expected cash flows in case you have decided to rent out the house in which you are already living in, add up expenses related to the house like the mortgage you are currently paying for it, insurance premium, tax payments and amount spend on the repair & maintenance of the house annually. Then subtract the figure so calculated from the expected income by renting of House Property and then, if you are left out with some cash in hand, it would be a feasible decision to let out the property, but if the final numbers are close to zero, then you might have to rethink your decision to let out.
Today’s rental market is notoriously expensive, and competition among lessees is high. Even if you’re not looking to be a landlord long-term, it could be financially wise to rent out your unit at least until median sale prices in the region peak.
Choose your Investment Type
Many investors default to considering individual direct ownership as their only way to profit from real estate. However, partnerships (both close and limited) and publicly-traded investment trusts are designed to help investors who might not have the time, or the skills, to run real estate investments on their own. Real estate investment trusts, on the other hand, enable investors to fund multiple projects simultaneously without the hassle of day-to-day management.
Unsurprisingly, your financial capabilities, estimated profit margins and choice of investment are all interconnected. Whether you’re starting out with some Lacs or Crores, staying informed in the real estate industry — even as a passive investor — is a key to success.