8 tips for a successful investment in rental property
Buying a property can be an important and involving act. The gain in investment must be realized at the time of purchase. This is achieved by defining your motivations, your financial capacity, and a pragmatic approach in the acquisition process.
Here are 8 tips for a successful real estate investment.
1. Evaluate your investment capacity
Evaluating one's ability to buy is the first step to a successful investment in rental property. This estimate will allow you to define your budget, and consequently the type of property that will be the object of your research and negotiations.
In countries where real estate credit is practiced, you can consult your bank to determine your disposable income and your maximum debt capacity. For a better-optimized credit, the future rents should be close to the amount of the monthly credit payments; the best being that these two sums are equal so that the real estate itself pays the monthly payments (self-financing).
2. Define the right location in a city or town you know
The objectives of an investor are to have tenants quickly, that they are stable and that they pay their rent regularly.
To put all the chances on your side, it is necessary to put yourself in the shoes of the future tenant to validate the location within the city: is it easily accessible (proximity of transportation, main roads)? Is it easy to do your shopping, to drop your children off at school? Is the neighborhood safe during the day and at night?
It is in a known environment that we can best project the expectations of future tenants. Buying in a city that you do not know and without having moved is the best way to miss your investment.
3. Define the type of property you are looking for
The two previous points have allowed you to define a maximum budget and a search area. It remains to define and find the ideal property.
Should you choose a studio, a 2-room apartment, etc.? It is important to understand that a real estate investment is something personal: the ideal property is different for each person.
Upstream, the future investor will have to determine his actions in choosing the best type of property possible. Several motivations can indeed push to invest, of which the most common are: to constitute an inheritance for a complement of retirement, to accommodate his children or parents later, to finance his future second home by renting during a few years, to defiscaliser (tax reduction, in the countries where it is applicable)
4. Use the right search methods
Several means are available to find the ideal real estate, first of all, the Internet. The web is full of real estate ads. It is easy to make a selection of properties corresponding to your budget and your search area.
Going through local real estate agencies can help to save time, as they can propose properties they have for sale. You can also use the services of a real estate hunter or property manager, who will look for matching properties, thus saving you time and energy wasted in unnecessary visits.
You should not be afraid to use these professionals because their services are only remunerated by a commission once the sale is completed.
5. Avoid the "instinctive" side in the choice
The "crush" is the real estate investor's number one enemy. Remember that you don't choose a property for yourself but to have a maximum chance of renting it easily, durably, and profitably.
Contrary to the acquisition of a principal residence, the rental purchase is based on practical and rational criteria, with the quality of the location and the potential profitability of the place in the lead. These two criteria are directly related to the wishes of a tenant: to have a home close to its amenities within a reasonable budget.
The housing acquired and the rental conditions must appeal to a maximum number of people.
6. Do not rush to buy and always visit
Not rushing means taking the time to validate the location, to get information on the rental market, to visit and compare the prices and services of several properties.
It is true that the good deal may or may not be on the market just when the future buyer is looking for it. If necessary, you should not hesitate to postpone your purchase, to analyze and balance the objectives and constraints of the investor.
When a property seems to correspond to one's expectations, visiting the property in person can sometimes avoid major disappointments. To smell the atmosphere of the district, to look at the state of the housing, to validate the location in the district, to check the accessibility,?
7. Evaluate the profitability of selected properties
The profitability of a rental investment is essential, whatever the objective. Examining this criterion will allow you to compare two properties before choosing one for purchase.
The gross profitability is the annual sum generated by the rental property investment, compared to the sum that had to be spent to obtain it. It is expressed as a percentage. In terms of rental investment, it is calculated as follows:
(Sum of annual rents - the sum of annual expenses) / Purchase price of the property.
For example, let's take an apartment purchased for $120,000 including notary fees, generating $400 in rent per month. On this rent, each month 50 dollars of charges and 7% of management fees are deducted, that is 28 dollars. The net rent each month is therefore
400$ - 50$ - 28$ = 322 $.
The gross annual profitability will therefore be 322 dollars x 12 months / 120,000 dollars x 100 = 3.22%.
8. Find a good manager
When it comes to rental investment, the manager is very important. His role will be to find the tenants, to make the inventory of fixtures, to collect the rents, to pay them to the owner, and to manage the problems if some occur.
However, not all managers are equal and it is very important to choose a good one to avoid disappointments.