Rental properties can be an amazing investment.
I have been an investor for quite a while now and my rentals have allowed me to feel secure knowing that the rent money will always be coming in from my investments, whether I’m working or not, and that is one reason I think real estate is the best investment out there.
While it may seem like it is really tough to get started as a property investor, it may not be as tough as you think.
Here are my 5 top tips if you’re a first time investor
Looking for the right mortgage
Potential real estate investors should make sure to understand their mortgage. If you get the right mortgage from the start, it could help keep your costs low and reduce uncertainty about the property’s cash flow.
(Cash flow is the income you make after paying all expenses, including the mortgage from your rental income).
When considering the purchase of a property, you should shop around for the best deal, catering your loan to your own personal needs can make all the difference to an investor. Do not just go with the same bank you have always banked with because it’s easy.
If this is a little scary for you, or you don’t have the time, my best advice is to seek help from a qualified, professional mortgage broker.
Turnkey or renovate
Once you have pre approval for your new investment loan, it’s time to start looking for the right rental property to purchase.
Most investors face the classic dilemma: go with a property that needs a lot of work but could have a higher rate of return, or go with a lower rate of return, but is a turnkey ready property with all the cashflow systems already in place.
With a turnkey rental property, you’ve already got a property in great shape and ready to lease.
If you choose to renovate, be sure you have considered the cost involved in renovating and the time it will take to complete the works. This can be a little tricky as there is nearly always something that crops up when renovating, that has not been considered. It is best to have a little contingency money set aside for this.
Also, when buying a property, about 90% of your purchasing decision will be based on emotion and only 10% on logic. This is understandable, when buying your own home as this is where you’ll raise a family.
It’s your sanctuary.
When it comes to investing, however, letting your heart rule your buying decision is a common trap to be avoided at all costs.
Focus on Your Return on Investment
Invest in an area that will get a good return on investment. A cap rate of around 7% or greater is ideal. You can find some amazing deals on the real estate websites, but try and find them within a couple of hours drive from your home.
To obtain the highest return on investment, you will need to know or investigate the area and find out what houses are selling and renting for in the neighbourhood.
Purchasing your property
Some of the things you should look for or consider when searching for the right investment:
1: Is the property liveable from a tenant’s perspective? Remember, while you won’t be living here, someone else will, and they’ll be paying you to do so.
2: Ask yourself, is the floor plan appealing and will the property provide a comfortable, practical home?
3: Always do a second or even third inspection at different times of the day.
4: Is it noisy during peak hour?
5: How does light work at different times?
6: Are the neighbours party animals or quiet?
Ticking all of the right boxes when you inspect a property will ensure you buy the best possible investment every time.
Also, knowing the vendor’s motivation can make a big difference when it comes to negotiating a good price on a property you have interest in. Sometimes just a short settlement period can make all the difference.
Once you have decided on a property and want to make an offer on it, it is important to include the relevant inspections as part of your offer. These are usually building and pest inspections, and are done to uncover any structural defects or signs of pest infestations like termites, before the contract of sale is final. If the inspections find the property has major structural defects or pest infestations, you can usually end the contract before the contract becomes unconditional. The fees for these inspections are tax-deductible and can save you thousands in the long term.
Managing your property
You’ve done all the groundwork and secured the perfect property investment…now the hard work really begins!
Many investors think by self-managing their portfolio; that is finding their own tenants and acting as their own property managers by organising the collection of rents, maintenance, etc will save them a packet and give them greater profit.
Wrong, wrong, wrong!
In the short term, this might seem plausible enough, but what happens when you have a portfolio of say twenty properties?
The ongoing management of such a portfolio essentially amounts to a full-time job!
You have to find and qualify suitable tenants, know the laws pertaining to renting, have a firm grip on the value of your rental, conduct regular inspections to ensure your tenants are looking after your asset, collect the rent, represent yourself at tribunal should things go awry, deal with all the maintenance issues that crop up and be on call 24/7 for your tenants.
Sound appealing? I didn’t think so.
Paying a professional property manager to handle all of these things on your behalf will not only mean you get the best outcome for your rental property in terms of a good tenant and the best possible returns, but it will also give you something just as valuable as money when it comes to investing – TIME.
All of that time spent managing your properties could be put to better use, like finding more investments to add to your portfolio.
Remember, this article does not constitute financial or legal advice. Please consult your professional financial and legal advisors before making any decisions for yourself.