Investing in Real Estate: I'd Buy a Rental Property, But... (Part 2)
November 8, 2017 |
"I thought about buying a rental home, BUT..." IT'S TOO RISKY
Risk. It is something we are taught to eliminate from our lives. We purchase home car, medical and life insurance to protect us. The challenge is we can get caught up in avoiding risk at all cost, which can stop us from moving forward.
Investing by definition isn’t risky. The dictionary states that the word “invest” means to commit money or capital in order to gain a financial return. For a true investor, purchasing investment real estate isn’t about throwing caution
to the wind, it is about using sound investing models to make informed investing decisions.
Real estate inherently comes with some risk, but there are solid steps everyone can take to mitigate the risk and turn a rental property into a solid investment with a life time of financial benefits.
Here are a few steps that you can take to purchase real estate that makes a great investment:
1.) Know the true market value of the home and the location you are buying in. The old adage of “You make your money when
you buy” has been around forever, because it’s true. There are four factors that you need to feel comfortable with before purchasing:
• What is the house worth today?
• How much will it cost to fix it up?
• What will it be worth after?
• What will it rent for?
There are investment savvy real estate agents that can help you truthfully answer these questions. In addition to your agent, it is a good idea to bring in a reputable local property management company for a free analysis of the current rental value
and the desirability for renters.
2.) Get the right financing. If you have a solid fixed rate loan that works from day one from a cash flow perspective
– it should work even better 5, 10 and 15 years later as rents increase. 100% financing and variable rate loans are risky. If you are averse to risk, don’t do it. If you have cash on hand for an entire purchase – run the numbers closely to determine
if paying cash or leveraging your money is best for your personal needs. Once the property is rented and has cash flow, save up 6 months of expenses for your property. This will do wonders for your peace of mind when a property becomes vacant or the
roof starts leaking.
3.) Protect your home. One good thing about having a mortgage is that they will never let you forget to keep a good landlord
insurance policy in place for the property. If you pay cash for a property – ALWAYS make sure you are adequately protected
through insurance. Consider an umbrella policy in addition to your regular policy. An investor savvy insurance agent is an essential member of your team.