It is a known fact these days that buying a rental property is one of the most secure and relatively fast way to build wealth and create cash flow, but sometimes lack of knowledge creates major problems for homeowners or investors in the future. Here are a few points to remember before jumping in!
- Always be thinking Long term – Acquiring decent properties, in decent locations will always always yield higher cash flow and better returns. Long term ownership is the key here, if you are an experienced investor, then you are aware that get-rich-quick schemes don’t typically work for real estate investments. Profitability is dependent firstly, on shorter vacancies that that result only when your property is marketable and in a desirable location. Second, attracting quality tenants which is possible only if you have a quality home (not a poor conditioned, neglected and run down home). So think long term and invest in decent properties that will make your life easier in the future.
- Use the 1 % Rule – this formula is a realistic way to evaluate how good or bad a property will turn out for you. It’s simple, Example 1 below is a fairly decent deal, and however example 2 demonstrates a property that will result in being an expense for the owner.
Example 1: If you can collect $1,600 per month in rent and you paid $200,000 for the property, you are collecting rent that is 0.8 percent of the purchase price (0.8 percent = 80 basis points in financial terms). And that’s probably a really fair deal.
Example 2: If you can collect $1,600 per month in rent and you paid $400,000 for the property, you are collecting rent that is 0.4 percent of the purchase price, or 40 basis points. And that’s not a really good deal.
- Knowing the importance of quality properties – As mentioned earlier, Smart investors know that good areas with good school districts, lower crime rates and decent amenities will provide positive cash flow and better returns. Obviously, factored in with good, quality tenants who have good credit and good employment.
Every investment property needs some maintenance, usually cleaning, painting, plumbing and electrical work but buying a property that is already in decent shape, although it might be a little costly than a C grade properties, will be less troublesome for you!
- Do your homework – Have a clear goal of what exactly is the purpose of this investment.
– Research on what kind of property you want to buy
– What kind of neighborhood you want to invest in
– The average rent in that area (comparable leases)
– What kind of return on investment you are hoping for
These questions are very critical in determining whether your investment will yield a positive or negative cash flow. So make sure that you spend a big chunk of time in researching and answering these questions.
***Key is thinking long term: investing in quality properties, which attract quality tenants and provide positive cash flow, as well as shorter vacancies, higher returns and stable and long term tenants.
Remember Landlord – ing 101: Be knowledgeable and don’t forget this basic equation,
Quality Product = Quality Tenants
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