Purchasing Real Estate Assets To Meet Financial Goals

Are there any easy ways to create passive income with real estate? Yes, if you consider “passive,” not being hands-off.

The buy-to-rent strategy is not passive; your workload is dramatically reduced when you outsource property management.

With all real estate, there is maintenance and replacement of everything.
Over time, everything deteriorates, and you may wish to do the maintenance or let a third party do it. Once again, your choice determines how ‘passive’ your real estate investment is on your time.

Why do people choose to invest in real estate?

Leverage

Leveraging your savings into an investment with a much higher ROI is the overriding motivation to invest in real estate.

Your savings will make up a lower portion of the property sales price with the remaining funds borrowed, i.e., a mortgage.

The rental income should be enough to cover all outgoings, including maintenance, rates, and management fees. Ideally, some rental income will be leftover, which you can use to improve the property or earn additional personal income.

Plus, when the time comes to sell the property, it will most likely have increased in value, so your savings will significantly boost when you return the profit from the sale to your bank account.

Financial Security

You must put something away regularly to support yourself and your partner through retirement. That something is money that should be making money.

Everyone knows leaving savings in the bank is the last resort as the interest rate paid is meager.

For example, do you want to earn less than 1% of your money? Currently, the best savings rate is .6%, so if you had $30,000 in a savings account, expect $180 interest or $15 per month.

You can do a lot better than that with a rental property. You can get more money after monthly expenses, but you also get to hold onto the asset for as long as you can and time the sale to get a much higher price than what you paid for the property.

What’s not to like about investing in real estate?

Calculating The Risks

One risk is not knowing anything about investing in real estate. There are many strategies, and not all property deals are the same.

Remember you’re borrowing a large chunk of money to buy the asset – and you will need to pay the repayments and return the loan when you sell up or earlier if you default on the mortgage repayments.

Increasing your debt

When you don’t know what you’re doing – if you already have a mortgage on your own home or perhaps struggling to pay off outstanding debt, taking on a second mortgage may not be the wisest action.

However, if you get the numbers right – it could be precisely what you need to do. For example, when there is surplus rental income after all the outgoings, you can use it to help meet your home loan or other loan repayments.

This works when you engage a real estate accountant who understands property investment and can crunch your numbers. Once you have the formula, you can assess the viability of further rental property purchases.

Taxes, fees, and maintenance costs

Don’t forget to pay your taxes. Some experts suggest a contingency fund that will see you through six months. Your emergency fund doesn’t have to be money in the bank – it can be a loan not used until you need it. These funds really should be just for emergencies, which may include:

• Urgent repairs or replacement
• Rental property vacancy
• Safety upgrades required by law

There are quite a few expenses with owning a rental property. It’s where many novice investors go wrong – they don’t calculate outgoings correctly and end up with less rental income than needed for the property to be financially viable. When the rent doesn’t cover costs, the property owner has outstanding expenses, some of which include:

• Rates
• Insurance
• HOA or property management
• Taxes

Time-consuming

New property investors have no idea how much time is required to manage their new assets, so the word ‘passive’ is often misused. If you use a third-party provider, managing tenants may or may not be needed. However, you will still have administrative work to keep track of all incomings and outgoings for your tax calculation.

Plus, every time there is a property inspection, all you need to do is read the report – that does take time, and you may need to assess and approve maintenance jobs.

Difficult tenants

Say you decide to manage the property yourself – finding tenants is not as easy as it may seem, even when many people are looking for a home to rent. How do you know you have chosen the best tenant?

There is an element of risk, as even after completing a screening process, conducting financial background checks, and undergoing routine checkups, the tenants may still not be a good fit.

No longer can you evict your tenants – even when they haven’t paid the rent regularly. You, as a landlord, need to follow a hefty legal procedure before getting the tenants out of your property so you can start the tenant selection process again.

Using a property manager with experience with tenant selection and the local tenancy law and agreement can make a world of difference to your success with a rental property.

Decreasing property value

Not all things go up—if you choose the location and property well, you’ll eventually have the best opportunity to sell the home for a profit.

However, there may be some unknowns to deal with, including the degradation of an area due to increased crime, suspicious activity, or lower employment rates. These and other factors can impact the value of your property over time and may impact rental income if you struggle to get tenants.

What do you do if your property is dropping in value?

Don’t panic. Assess why it’s happening. Is the property market going through a downturn, or does your home need a major renovation to make it more desirable? Knowledge is power, and with it, you have options. Aim to sell in an upturn market – where property values are increasing.

Buy-To-Rent Real Estate Options

What are the property types and investing options?

Apartments

The standard buy-to-rent apartments in larger cities and more densely populated metropolitan areas make good rentals.

Apartments are affordable, meaning their market price is lower than that of some single-family homes. Additionally, upkeep and general maintenance are more manageable and can be more cost-effective. Building maintenance and upkeep of common areas are shared costs with the other owners.

Detached and Semi-Detached Single-Family Homes

Although homes are perhaps a bit more expensive to purchase, they attract more tenants, so the tenant pool is generally more prominent than that of apartments.

With a faster turnaround, you can rent this property to a couple, a single person, or a small family.

Single-family homes can be found in areas with good schools, public parks, and other nearby amenities, which means that you’ll be able to get long-term renters.

Single-family homes may attract higher mortgage payments, maintenance costs, and property taxes, so make sure you use the formula to check the viability of this type of home as a rental.

Detached and Semi-Detached Family Homes

As with single-family homes, larger family units are growing in popularity as more people look to leave the inner-downtown areas of busy cities.

A large detached or semi-detached family home can be rented to a specific family or subdivided among various tenants.

With a large family, you may have more renter consistency and passive income, whereas with subdivided renters, you can have overlapping rental income during vacancy periods.

Larger homes offer a higher form of passive income, but upkeep and maintenance can be expensive, and in the event of a prolonged vacancy, you may lose more money, which may take a while to make up for.

Commercial Property

Residential property is the usual go-to for property investment. Many residential investors eventually also have commercial properties.

Commercial property in areas with high foot traffic and popular anchor stores, generally large big-box commercial stores, can be a potential investment opportunity. There’s a growing need for commercial property, and as neighborhoods expand, newer and more modern commercial spaces will become available.

Commercial property is not without risk, and extended periods of vacancy and higher renter turnaround might impact long-term financial goals. Third-party investors, such as corporate property management groups, are usually involved, and they can quickly dominate the playing field or easily buy you out.

Vacation Property

If you’re lucky enough to already own a secondary home or perhaps a vacation home, you’re in the perfect position to use it, maybe to grow your passive income.

Vacation homes are a great way to use unused property, especially during peak seasons. These homes can be rented day-to-day or perhaps for a more short-term period.

While renting out your vacation home may not seem like the obvious choice at first, you will still need to declare any passive income to the local tax regulatory authorities.

Additionally, renting out a vacation home shared among other family members can make things a bit more complicated, as various parties of interest will need to be considered first.

Real Estate Investment Trust

These might not be the traditional or standard property investment practices you’re used to, but REITs are one of the more passive income investment options available.

REITs allow you to invest in mutual funds, usually from companies already owning properties and mortgages. Investing in a REIT means that you are indirectly purchasing a portion or percentage of a property, which, in the long run, will allow you to benefit from the growth of the property.

Your investment will grow as the property grows in value and the company acquires more real estate. This is one of the easiest and least frequented ways to invest in real estate.

Summing Up

Nothing worthwhile is easy, and using your savings to make money does take know-how, hard work, and time.

Make sure you have a good team of experts, including an accountant, property manager, and lawyer, to help you.

Also, make sure what you’re doing fits your goals, including your family goals. Your partner needs to be on board with your plans and understand what you’re doing, why, and how it will improve the family’s financial security.