Traditionally, real estate has generally been a good investment option for people looking to grow their money. It can generate ongoing income and can be a great long-term investment. If you’re thinking about entering the world of property investment, there are a few things you should consider first. 

Do You Want to Be a Landlord?

Perhaps the most important thing is to ask yourself if you even want to be a landlord. Being a landlord can be both rewarding and frustrating. Do you know how to market a property for rent? How about screening applicants? How comfortable are you with unclogging toilets and making repairs? Do you have a system to collect rent? What happens if someone doesn’t pay their rent? Do you know what your legal responsibilities are as a landlord? 

Is your head about to explode? Don’t worry. Just because you answered “no” to all these questions doesn’t mean property investment isn’t for you. It just means you may want to consider a property management company to take on all of it for you, particularly if you’re a new investor. 

Financial Stability

Property investment is not the way to get yourself out of debt. It is a way to make money and diversify your portfolio. Experts highly recommend paying off your debt (or at least most of it) before making the jump into the world of property investment. You also want to consider potential expenses in the long-term. Do you have kids getting ready to go to college? How secure is your job? 

Property Search

Not every home is a good fit for property investment. If you were in the market for yourself, it’s perfectly reasonable to look at the property from a personal standpoint. However, purchasing a property for an investment is a bit different. Just because you like the property personally, doesn’t mean it’s a good fit. Is the property financially viable? Are there significant repairs that need to be made before it can be rented, which would delay your income? Is the property in a desirable area that can fetch the monthly rent necessary to make it a profitable income producing property?   

Cash vs. Borrow

Do you have the financial ability to pay cash for the property or will you need to finance it through a bank or mortgage lender? Much of this comes down to what your financial situation is. It is important to remember however that while you may face a vacant property between tenants, the bank will not excuse mortgage payments. It’s important to ensure you have the financial ability to pay all of the expenses associated with the property – including utilities – if your property is vacant for a period of time. 

It should also be noted that interest rates for non-owner-occupied residences (such as rentals) tend to be higher than traditional mortgages for owner occupied properties. 

Rate of Return

Rental rates differ from area to area and property to property. It’s important to ensure that what you’ll be able to rent your property for is enough to cover your expenses and then some – otherwise what’s the point? In general, it should be between 35% - 80% of your gross operating income. So, if you charge $1,500 per month and your expenses are $600 per month, your monthly operating expenses are 40%.

Expenses

This goes hand in hand with rate of return and determining whether a particular property is the right property for you. In addition to closing expenses, repairs, and upgrades, it’s also important to consider long term expenses as well, such as property taxes and HOA fees. Any money spent needs to be included in determining whether the property is a financially sound investment.