If you’re looking to build up passive income streams, you might be considering an investment property. There’s no doubt that collecting rent payments can help you increase your savings.
Investing in real estate is generally a smart financial decision, as long as you have the funds on hand, but you’ll also need to be prepared to take on new responsibilities once you close on the property. An investment property is not a purchase to be made lightly. These tips will help you find the right house and manage your property once you’ve handed over your down payment.
Decide on Location
Which neighborhood do you want to invest in? Buying a relatively cheap home in a location where property values are steadily increasing can help boost your profits in the coming years.
Spend some time researching home prices in the area where you plan to buy, and take note of how quickly the average home sells. This will help you budget for your down payment and figure out how much time you’ll have to make an offer. For example, if you’re thinking of purchasing an investment property in Cocoa Beach, Florida, you should know that in this somewhat competitive market. Redfin data as of March 2020 shows that the average home sells for about 3.2 percent less than the listing price and generally stays on the market for 84 days. No matter where you plan to buy, look up the relevant statistics to get an accurate picture of the market.
Keep in mind that you can’t purchase an investment property with a small down payment. According to Mashvisor, you will typically be required to offer a 20 percent down payment. Furthermore, you need to be prepared for additional expenses — opening an online savings account and making regular contributions to cover those costs is a good idea. And if you have personal debt, you should aim to pay it off before investing in real estate. It can be tempting to look at foreclosures for a better deal, but these homes may also require expensive repairs. When you factor in those expenses, that low asking price doesn’t look so cheap after all.
Purpose of Property
Once you’ve officially purchased your new investment property, you’ll need to make a decision about whether you will rent it out for long-term tenants or short stays. Which option will be most profitable? It all depends on the location. Renting to long-term, residential tenants will generally allow you to enjoy a steadier cash flow. But if your property is located in a popular vacation spot, where the population fluctuates depending on the seasons, you should consider renting it out to tourists instead.
If you decide to rent for vacations, contact your local zoning board first. Some areas do not allow for short-term rentals, and the last thing you want is to pay hefty fines. The same goes for your HOA — some home and condo owners’ associations mandate that the home is used for personal purposes only.
Repair and Renovate
You’re probably looking forward to approving tenants and earning income from your property, but first, you need to ensure that every room is in good condition. Inspect your property, take note of any repairs, and consider if you want to go forward with any cosmetic improvements. If you’re handy, you can also carry out some DIY renovations. LawDepot suggests spending the most time and money on upgrading your kitchen, bathroom, and flooring.
Marketing and Advertising
Finally, you need to decide on your rental price and implement effective marketing and advertising techniques to attract good tenants. Find out which online rental platforms are popular for renters in your area, and then list your property on these websites. You may want to have professional photos taken. Clearly state your contact information and applicant requirements so that prospective tenants can easily get in touch with you.
Investing in rental property does have its risks, but overall, it’s generally a solid personal finance strategy. Having reliable passive income can help you retire earlier, travel more often, or save up for other major goals, like sending your child to college. If you thoroughly research the process before you dive in, you can choose a property that will reap serious profits.