For any beginning investor, the appeals of a real estate investment are many. An investment property can be relatively stable in most economic conditions, building values and propping up ROIs.
However, there are challenges to starting your investment journey as a landlord.
Here, we’ve assembled a list of seven tips for helping you address any problems you may encounter and begin making money quicker.
#1: Build an investment budget
For any real estate investment, you aren’t safe until you’ve built some equity in the property. That is why it is absolutely essential to build a budget now that can give you equity in a home from day one.
Understand exactly what you want out of a property and plan for your overhead costs. You won’t be able to get into the landlord game without a substantial downpayment.
Most financing requirements will be more stringent than what you may have dealt with in your first property anyway. This will require you to put at least 20% down. The more you have on the property initially, the greater the chances of receiving higher returns faster.
#2: Be prepared to spend 80% of the home’s value in acquisition costs
Budgeting for your down payment is key, but don’t forget the other acquisition costs in the process. Closing costs, taxes, renovations, touch-ups—everything comes with a price tag.
With each expense, your margin of returns grows narrower, taking longer for you to end up in the black. If you plan to finance for an amount over 80% of the final property value, you are likely to lose out in the initial months or take a longer time receiving any returns.
You want each month’s rent to help you accrue value. With financing costs anywhere over 80% of the property’s value after all your expenses in making it rent-able, you simply won’t be as easily able to make money.
#3: Plan for all your expenses
Before you calculate just how high your monthly rent needs to be to help you grow your ROI, inventory the ways every predictable expense will impact your returns.
Here are a few expenses some aspiring landlords fail to consider when planning their investment schedules:
Insurance
Maintenance
Utilities
Vacancies
Homeowner association fees
Property management expenses
They may seem marginal, but these costs can end up taking up to 55% of the rental income you receive. Calculate them into your budget to determine your expected income.
#4: Prepare a positive cash flow
Acquiring a positive cash flow comes about through careful calculation and market awareness. You want to shoot for a monthly income in the range of 1% of the costs you spent on acquiring your property, which means thorough consideration of the market and associated costs.
If the total amount you spend to prepare your property for renting equals $100,000, you should be able to charge at least $1,000 in monthly rent. This doesn’t mean the value of the property on the market, simply the cost of acquisition.
To prepare a property that can bring you a positive cash flow, you may have to browse markets to find the best deal.
#5: Find a location that works for your calculations
Real estate markets all across the country have their own various selling points. When it comes to finding the perfect property for your investment, you want to be sure the local market can support your returns.
On top of the usual neighborhood analysis—schools, crime rates, available amenities—take into account the state of the local economy and vacancy rates. Ideally, you want a property that is up-and-coming, where vacancy rates are low and demand is high.
Then, the money you need to spend in acquiring your property should work for your return rates, catapulting you into success as a landlord.
#6: Leverage your financing
While you may not be able to accrue enough capital to buy a property outright in cash, the financing you need can be used to the best effect. Seek out deals in which you can acquire low interest rates and leverage your financing to build your income.
With the right investment—say a property a few states away that you can easily charge 1% or more the value of your acquisition costs—you can begin to grow equity that builds over time. Turn that growth around into a higher-value property, and keep compounding your returns.
Even though the investment process can start as a method of leveraging debt, your ability to build wealth can make the process worth it. Be careful, however, as the wrong investment can damage your ability to grow your assets.
#7: DoN’t go it alone
For any investor looking to become a landlord, a real estate investment should not be made alone. Consult financial professionals, real estate brokers, and property managers to help you determine what property is right for your investment goals.
Real estate investing is one of the safest and most stable methods of building value, but to make money more quickly, you need all the help you can get.