Guest Post by Paul Ryan
A penny saved is a penny earned, but a penny invested can turn into dollars down the road. Buying an investment property can be a solid way to make money and diversify your portfolio. It also comes with some costly downsides. Here are some factors to consider before you decide to take the investment property leap.
Risk vs. Reward
Making a profit in real estate isn’t for the faint of heart. It can be a great source of passive income, and real estate has had a stable rate of return over the years. There are also tax deductions from mortgage interest, property taxes, and some expenses. On the flip side, you could face expensive repairs, vacancies, bad tenants, a downturn in the rental housing market, and property tax hikes. Like any investment, determine your risk tolerance before sinking money into a property.
Calculate the Costs
Along with the down payment and mortgage, you’ll pay taxes, homeowners insurance, possible HOA fees, and maintenance. A good rule to follow for rental properties is the 1% rule. Simply put, a home that costs $100,000 needs to bring in $1,000 a month. If the property you’re considering won’t meet this rule, you might want to skip it. Exceptions can be made in up-and-coming locales where home and rent prices may make a significant jump.
Next decision: Are you going to handle maintenance and repairs yourself or hire a property manager? Upkeep and landscaping can eat into your profits. You can save money by doing it yourself and installing low-maintenance landscaping such as xeriscaping and ground covers. Keep in mind: You’ll need to be available when things go wrong: plumbing disasters won’t wait for the weekend. You can save yourself this hassle by hiring a property manager, but it’ll cost you. The going rate is around 10% of the rent.
You usually need a down payment of at least 15–20% for an investment property, unlike the lower rates for your primary residence. Lenders consider these loans to be higher risk, so you’ll pay more to finance a second property. Interest rates can also be higher, and approval requirements for loans can be stricter. The financial experts say it’s a good idea to have other debts paid (student loans, credit cards, medical expenses, etc.) before seeking this kind of loan.
Where and What to Buy
Location, location, location. Cliche, yes, but this is crucial for any real estate purchase. Research the area you’re considering. Homes in West Asheville may cost you more, for instance, but they’ll rent out faster and for a higher price.
Research the population growth. With an influx of more than 30 people a day, rents are going up in Asheville, so you should have no trouble covering your mortgage and expenses. You also want to take note of the number of vacant properties in the neighborhood. If there are a lot of empty rentals, that isn’t a good sign. Safety is another consideration, and if you’re hoping to rent to families, so are good schools. It’s a good idea to research the area first, then look for specific properties.
Should you Flip?
Flipping—or renovating a fixer-upper needing a lot of work, then selling it for a profit—may not be the best bet, especially at first. If you don’t have contractors who can do the job cheaply, you’ll probably spend more than you bargained for on renovations. Focus on properties needing smaller repairs that fit your budget.
If this is a vacation property you’re hoping to sell for a profit down the road, ask yourself similar questions. Is the housing market strong in that area? What is the cost of ownership? How often will you be able to use the property? If you’re hoping to use it as a vacation rental, you’ll need to do the leg-work yourself or hire a property manager.
Like many money-making ventures, investing in real estate requires an upfront cash infusion and can take time to pay off. But with some due diligence and good timing, you can make a pretty penny off your investment property.
Paul Ryan is an aspiring novelist who supports his hobby with his investment properties. He owns three homes which he maintains himself and rents out. His biggest pet peeve? Tenants who don’t mow the lawn regularly.