Are you thinking about buying an investment property? There are many reasons to believe that real estate is a good investment. It has been the source of wealth for many of the most successful people in the world. However, experts agree that, like any other investment, it is better to have a good knowledge before you invest hundreds of thousands of dollars. These are some things to consider and research.

Are You Cut Out To Be A Landlord?

Are you able to use a toolbox and know what it is for? Do you know how to fix drywall? You could hire someone to fix it, or you could call someone. But that will cut into your profits. To save money, property owners with one or two houses often do their own repairs.

Pay Down Personal Debt

While savvy investors may carry debt as part of their portfolio investment strategy, the average person should avoid it. Renting a property is not the best option if you have student loans or unpaid medical bills.

Secure A Downpayment

An investment property generally requires a higher downpayment than an owner-occupied property. They also have stricter approval requirements. An investment property will not work with the 3% downpayment you have already paid on your home. A 20% downpayment is required, as mortgage insurance is not available for rental properties. A personal loan may be an option to finance the downpayment.

Locate The Right Location

It is not a good idea to live in a rental property that is either declining or stabilizing. Potential investment opportunities include a city or area where a revival plan is underway and the population is growing.

Look for an area with low property taxes and a good school district. Also, make sure there are plenty of amenities such as restaurants, parks, shopping centers, and movie theatres. A neighborhood with low crime rates and easy access to public transport, as well as a growing job market, may provide more potential renters.

Do You Finance Or Buy?

Which is better: to invest with cash or finance it? It depends on what your investment goals are. Positive monthly cash flow can be generated by paying cash. For example, consider a $100,000 property you rent. The cash buyer can earn $9,500 annually or 9.5% on the $100,000 investment. This includes rental income, taxes, and depreciation.

Financing can offer you greater returns. For example, an investor who invests 20% in a house and compounded at 4% on the mortgage would earn approximately $5,580 annually after deducting operating expenses and interest. Although cash flow is lower, a 27.9% annual return for the $20,000 investment is significantly higher than the 9.5% earned by the cash buyer.

High-Interest Rates Are To Be avoided.

Although borrowing money may seem relatively affordable in 2020, the interest rate for an investment property is usually higher than that of a traditional mortgage. Therefore, you will need to make a low monthly mortgage payment if you decide to finance the purchase.

Calculate Your Margins

Wall Street firms that purchase distressed properties seek returns between 5% and 7%, as they have to pay staff, among other costs. Individuals should aim for a 10% return. Maintain the property at 1% annually. Other expenses include homeowners insurance, homeowners association fees, property taxes, and monthly expenses like pest control.

Invest In Landlord Insurance

Protect your investment with landlord insurance. This type of insurance covers property damage, loss of rental income, and liability protection in the event that property maintenance issues injure a tenant or visitor.

Factor In Unforeseen Expenses

Your rental income will not be affected by maintenance and upkeep expenses. However, there is always the possibility of an emergency arising, such as roof damage due to a hurricane or burst pipes causing extensive damage to a kitchen floor. Therefore, you should set aside 20%-30% of your rental income to cover these costs. This will allow you to have an emergency fund in case of need.

Avoid The Fixer-Upper

It can be tempting to buy a house at a discount and turn it into a rental property. This is probably not a good idea if it's your first property. You will likely pay too much for renovations unless you are a skilled contractor capable of doing quality work at a low price or if you have the skills to do large-scale home improvement projects. Instead, look for a home with minor repairs and a price that is lower than the market.

Calculate Operating Expenses

Operating costs for your new property will range between 35% to 80% of your gross income. You'll be at 40% for operating costs if you rent a property for $1,500 and your monthly expenses are $600. The 50% rule is a simpler calculation. You can expect to spend $1,000 if the rent you charge per month is $2,000

Determine Your Return

What is the return on every dollar you invest? Stocks can offer a 7.5% cash-on-cash return, while bonds might pay 4.5%. It is healthy to earn 6% your first year as a landlord, particularly since that number should increase over time.

Purchase A Low-Cost Home

Your ongoing expenses will increase the more expensive your home is. Experts recommend that you start with a $150,000 house in a new neighborhood. Experts also advise not to purchase the most expensive house on the block.

Know Your Legal Obligations

The laws governing landlord-tenant relations in each state and region are important for rental owners. It is important to be familiar with your tenant's rights and obligations to avoid legal problems, such as security deposits, lease requirements, and eviction rules.

Compare The Risks And The Rewards

You must decide if the potential risk is worth the possible benefits before making any financial decisions. For example, is real estate still a good investment?

The Rewards

• Your passive income means that you can make money even if there are initial costs and ongoing upkeep.

• Your investment will also increase in value if real estate prices rise.

• You can put real estate into a self-directed IRA (SDIRA).

• Social security tax does not apply to rental income.

• Tax-deductible interest on investment property loans is the amount you pay.

• Real estate values are more stable than the stock markets unless there is another crisis.

• Real estate, unlike other financial products you can't see or touch and invest in, is tangible.

The Risks

• Rent income is passive but tenants can be difficult to manage if you don't use a property management firm.

• You may be subject to a 3.8% surtax if your adjusted Gross Income (AGI), is greater than $200,000 (single) and $250,000 (married, filing jointly),

• Your total mortgage payment may not be covered by rental income.

• Real estate is not like stocks. You can't sell it immediately if you need cash or the market goes sour.

• High exit and entry costs can result.

• Even if you don't rent, you will still have to pay the expenses.

Be realistic about your expectations. You should be realistic about your expectations. A rental property won't immediately bring in a large monthly income.

Consider working with an experienced partner to rent your first property. You can also rent your home out for a time to see if you are a good landlord.