The principle of investing in real estate is simple – you buy properties, generate rennet, and avoid bankruptcy so that you can buy more properties. Although it might sound simple because you put in your money and make it work to grow with time and make you prosperous, it is not at all easy. Yes, it is not difficult to new construction homes for sale Calgary if you have money but knowing how well it will serve your purpose of investment is an entirely different story. Although we usually refer to buying and selling homes when discussing real estate investment, the term real estate encompasses many more things beyond buildings. It includes the natural resources contained in the land.
The main attraction of investing in real estate is its more favorable risk/ reward profile than other investments. However, you cannot expect any liquidity from it. Before you put in your money in real estate as an investor, be clear about your investment purpose, whether you want to flip houses or use it to generate rental income. Next, you must be well versed about the intricacies of investment and know the techniques of making the money work harder so that you get the most for the dollar.
Here are the things you should consider and be conversant with the techniques of maximizing your gains.
Do not carry personal debt
Borrowing is one of the most common funding strategies for businesses. Many savvy real estate investors consider debt as part of their investment strategy while taking debts in their stride. However, if you start investing in real estate, it is better to become debt-free first before buying a rental property. Since you are a first time investor, better be safe than sorry so that you can avoid a bitter experience. Paying debts on time is paramount, and you must have a cash cushion for it. If you can ensure that your rental income is more than the debt payments, you need not start your investment by paying up debts.
Are you a DIY enthusiast?
Work out your profits correctly before investing in real estate because getting the numbers wrong can put you into trouble. How much money you can keep aside from your rental income after paying for maintenance, utilities, and other property upkeep costs determines your profit. If you are a landlord who is an expert in doing some of the maintenance work on his own instead of hiring a third party, then surely you can save some money that increases your profits. As you generate enough revenue, it paves the way for investing in a new property.
Be ready with a high down payment
When you buy a home for a living, you can get away by paying only 3% as a down payment, but the amount can be as high as 20% when it comes to investment properties. Investment properties have more stringent approval requirements, and remember that mortgage insurance does not apply for investment or rental properties. The down payment is your contribution to the investment, and you must be ready with funds arranged through personal loans or by borrowing from family and friends.
Choose the right location
Gather enough info about the rental market in the location you choose for investing in a rental property. Choose a location that holds good rental prospects with an upward momentum or stay stable with no chances of decline. For the best investment opportunity, choose a locale with a growing population or a location under active consideration for a revitalization plan. BesidesAlso, look for locations with low property taxes, a growing job market, and easy access to public transportation that attract a large renter pool.
Buy in cash or finance?
Based on your investing goals, decide whether you should pay cash to buy the property or seek finance. Buying in cash generates positive monthly cash flow after paying for taxes, depreciation, and income tax. An investment of $100,000 will provide a return of $9,500 annually, which translates into 9.5%. However, the returns are higher if you finance the property. For example, if you make a 20% down payment and the mortgage rate compounds @ 4% annually, you can expect annual earnings up to $5.580 after taking out the additional interest and operating cost. It means that you earn $5,580 on $20,000, which converts into a 27.9% return yearly, although the cash flow is less.
Calculate your margins
Individual investors should target a 10% margin or return on their investment. Assume that the property’s annual maintenance cost is 1% of the property value and consider the other expenses like homeowner’s association fees, home owner’s insurance, monthly pest control, landscaping, and regular maintenance and repairs expenses.
Take landlord insurance
Besides buying home owner’s insurance, think about purchasing landlord insurance. This type of insurance pays for property damage, offers liability protection, and even pays for lost rental income. If your tenant or any visitor suffers injury within the rental property premises, the insurance will protect you from any liability.
Mind high interest rates
Although the interest in borrowing money is currently relatively low, it is just the opposite for an investment. Investment properties attract a high interest rate as compared to traditional interest on a mortgage. Look for low mortgage interest when scouting for finances to buy an investment property. A high interest rate will only reduce your profit, and it can be challenging to hold on to the property in the long run.
Calculate operating expenses
Knowing the rule of the game will help you maximize your profit from real estate investment. But you must have a clear idea about the operating costs. Usually, operating expenses constitute 35% to 8% of the gross operating income. If the monthly operating expenses amount to $600 on a rental income of $1500, it translates into 40% operating expenses. However, try not to exceed the 50% mark for operating expenses.
Work out your return
Going by the market standard, if you earn a 6% return in the first year as a new investor in real estate, you should be happy that you have made a good beginning.
With persistent effort, you see the number rising in the coming years.