1031 Exchange, Affordability And Other Investment Property Tips
Before signing a purchase agreement to buy a rental property, do you know how much you can afford for the purchase and ongoing monthly expenses? Being a property investor comes with responsibility. You will need to know your rental income exceeds your outgoings, including repayments, insurances, rates and property maintenance.
Investing in real estate is another way to make your money earn money. Some investors build up a portfolio of properties and can live off the profit. In contrast, many other investors own a home or two as a saving plan that they can reap the benefit from when they sell later on, usually when it’s time to retire.
There are several different ways to invest in real estate, including REITs, and rent-to-own, however the most popular is the purchase of an investment property. Once you have the property you can choose to use Airbnb, or rent it out to tenants, or do it up and sell it for a profit. The choice is yours.
Rental Property Laws and Rules
Anytime you are buying, selling or renting real estate, there are rules and laws and a purchase agreement. There is a law for tenancies, to manage the rights of tenants, and landlords including rents, fair housing laws, termination and reasonable use of the property.
All budding property investors need to know the laws, even if they don’t directly relate to your current activity. For example, did you know of 1031 exchange? It allows for a swap of one investment property for another. There is a lot to know about investing in real estate, and you never know when your situation will change, so having a working knowledge of all of the laws in your area.
Know Your Price Limit
Of course, before buying any property, investment or not, you need to be aware of what you can afford. Take a look at your income, your bank balances, as well as how debt you have before making an offer. Get advice from a financial advisor, and ideally get pre-approval on a mortgage, so you know your price limit.
Do not over-extend yourself financially. Purchase a property within your price range, and focus on the numbers, not your emotions. Even if you’ve done your research on location, and you know the house will rent well, make sure the rental income covers your outgoings. Cashflow is king. Your rental property should cover all outgoings including mortgage repayments, taxes, insurance and maintenance as well as provide some profit.
Numbers Not Emotions
Your investment property must provide a reasonable return on investment, while it’s operating as a rental. If the property’s income is less than it costs, then you need to dip into your income to pay expenses. This scenario is not as ideal as the investment is not making money. However, a negatively geared property may be your strategy and holding onto the property is worthwhile as in time the rental income will exceed expenses. When you eventually sell up, there will be a capital gain.
Rentals Are Not Passive Income
When most people get an investment property, they see it as a great way to make some passive income. Unfortunately, this income is rarely as passive as you would have hoped. Either you manage the property yourself and prepare for finding tenants, answering questions, making repairs, as a landlord or hire a property management company. Remember outsourcing the management of the tenancy is a cost that you’ll need to cover with the rental income.
Making money with investment properties is attractive, but it is far from being passive. If you choose the property well, and the numbers add up, then you can reduce your workload, but even with a property manager engaged, you’re not entirely hands-off as you never should be with any investment. Keep engaged with the investment and how it’s performing. The annual tax requirements is a great time to assess your financial position and gauge whether it’s time to sell or build up your property portfolio.
There are winners and losers in property investment. The investors that do well are prepared, knowledgeable and love what they do. With learning, research and taking a keen interest in real estate, particularly in your area, you can be on top of your game.
Real estate markets change, usually following economic trends so expect change along the way. Most importantly you want to make sure what your investment strategy is robust and sustainable through the highs and lows in the property cycle to meet your end goal.