Advantages of Residential Real Estate Investment
Now might be an excellent opportunity to buy residential property to operate as a rental, despite what you might be reading in the news about slowing housing markets and rising interest rates.
Single family homes, condominium units and small (4 units or less) apartment buildings continue to be very attractive long-term investments for several reasons:
All of these types of properties can qualify for conventional 30-year fixed-rate mortgage loans for a 20% - 25% down payment, a huge advantage to investors compared to commercial properties that typically can only secure financing for 10 years or so and could require a much higher down payment (equity) in the 30% to 40% range; this gets even more challenging when you have to refinance the property, especially when the market drops significantly and forces you to put more money into the commercial property
Home prices, while higher than they have been recently, are still attractive in most markets and many good markets still have "bargains," if you look closely and are willing to fix a few cosmetic issues prior to renting the property.
Interest rates, although moving higher recently, are still very low by historical standards.
Demand for rental units will continue to be strong even if the economy slows down for a few reasons: 1) people will still need a place to live, 2) many people are "renters by choice" nowadays and 3) even more people have to rent because home ownership is unattainable due to down payment and credit standards, which have both remained at elevated levels since the Great Recession.
Don't forget the tax advantages - if you meet certain requirements you can deduct the loss from real estate property (due to depreciation of the building, a non cash expense) against your ordinary income, lowering your tax bill! Check with you tax adviser.
For all these reasons, it makes a lot of sense to purchase residential property and convert to rental use.
The most important thing to remember is that cash flow is king, and this can save your investment whether property values are growing or shrinking. The goal is to have positive cash flow each and every month to build up for emergency repairs or renovation initially and then to use for other investments when you have enough saved.
It's best to ignore the fluctuations in the value of your property as long as you can pay the mortgage, since this will slowly grow your equity in the property regardless of what happens in the housing market. In the long run, property values will increase with inflation. There's no better way to grow your wealth than with real estate investments because you can make a small initial investment and use bank loan (leverage) to acquire the property and you get to keep all of the appreciation over time.
Here are some quick tips when looking for a property:
When reviewing property listings, do a careful analysis of the monthly cash inflows and outflows based on realistic (below-market) rent and higher operating expenses. Leave yourself some room if rents soften or expenses increase so you can still enjoy a nice positive cash flow stream regardless of the markets. This is a great way to build your passive income strategy.
Use Craigslist, Zillow or other online sites to research rental rates that are being asked in your area and also talk to your real estate agent.
If there isn't positive cash flow with conservative financial projections, don't buy the property - move on to the next one. You may have to look at many properties before you find the one that meets your criteria - be patient.
Make a careful investigation of the property to make sure you are aware of all of the issues and also what the cost will be to fix-up the property to get it into shape to rent.
Plan for repairs and maintenance after you own the property and include that in your cash flow budget. If you aren't sure how much to budget, ask your friends who own rental properties or your real estate agent what their experience is and set aside a percentage of the rent for these costs. Expect expenses to spike when you have new tenants move in (my experience) and plan accordingly.
Make sure you have a good real estate agent who understands investment property (even better if they own a few themselves) and can write an offer quickly - this is especially important when buying foreclosed or short sale properties where there is usually lots of competition.
Be prepared to have enough for the down payment, closing costs, a repair reserve and costs to fix up the property - your real estate agent should be able to help you put a budget together for those costs
Also consider using a property manager if the monthly cash flow allows - unless you want to fix leaky faucets and change light bulbs yourself; I prefer to use a property manager and it's worth the cost to me but some people prefer to self manage if the property is close to their home.
Real estate investing is a team sport and you need to make sure you have a great team, including your real estate agent, lender and property manager!
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