Renting out a second property to paying tenants can be a great investment. Buying, selling and managing real estate has made a lot of people a lot of money, and real estate has traditionally been s solid investment, but it doesn’t come without a degree of risk.
Don’t get us wrong, an investment property can be a great way to supplement your income, but be sure to tread lightly. To be successful, you have treat it like a second job.
Here are a few important questions you need to ask yourself before buying a Richmond investment property.
Can You Afford the Investment?
Investing in a rental property can be a great way to earn some extra money, but it does require an initial investment. An investment like this shouldn’t be entered into on a whim. You should take careful stock of your personal finances to see if a purchase like this is viable.
If you carry a great deal of personal debt in the form of student loans or other similar expenses, now might not be the right time. Keep in mind, that unlike a traditional mortgage, investment property financing often requires a much larger upfront down payment, in the neighborhood of 20 %. More to point, mortgage insurance isn’t available on loans for investments.
Is it Right for You?
Depending on the type of investment you plan to make, it will likely be a long term commitment. If you plan on renting out a property, it could be months before you start to see a profit.
It also involves much more than just collecting a rent check each month. It helps if you’re handy, but rental property requires a certain degree of upkeep. If you’re not handy, it helps to know someone who is, or have the capital to pay out to have those services hired.
Do You Have a Plan?
Just like any business, it’s essential that you go in with a solid plan. It’s important to know your margins and be aware of repair and maintenance costs. With a good knowledge of your margins, you can put together an operational budget to get an idea of what your return on investment is likely to be.
A good rule of thumb is the 50% rule for operating expenses. If you are charging $2000 for rent, expect to pay $1000 in total expenses.
Have You Found the Right Property?
Be wary of the fixer-upper, especially as a first time investor. The amount of money needed to take care of repairs can be misleading, so unless you’re pretty handy, it might be best to avoid these types of projects.
Beyond the money involved, time is also a factor. If a property needs a lot of repair work, it will take even longer before the property can start making you money. The majority of first time investors won’t have the luxury of a lot of time.
Who’s Going to Manage the Property?
If you live in the same city as the investment property you’ve purchased, are you ready to step into the role of landlord? As we’ve pointed out, managing a rental property is about much more than collecting a rent check each month. You’ll need to be responsible for repairs, as well as following up on delinquent tenants. It’s also important to keep up-to-date with tenant law, so you can follow proper procedure if you ever need to evict a tenant.
A property management company can take care of all these services for you. They have experience vetting prospective tenants, and its their business to keep up-to-date with any changes to tenant law. This is, of course, another expense that needs to be worked into your business plan and operating budget.