Useful Tips On Buying Your First Rental Property

The ROI (Return On Investment) for a good investment property can fluctuate somewhere between 3% and 10% annually. If you own several objects for more than a year and manage them effectively, then you might get a bigger ROI, becoming a professional in the area, and even creating a property management company in the near future. But that’s doable if that’s your thing. While some experts say that running a commercial estate is a passive income, it actually requires a lot of active actions, and not everyone fully understands them and can cope with them.

Buying rental property: what you should consider first

Any strategy for real estate investing for beginners requires you to make the full calculation of cash flows given your financial situation: how much money do you have, whether you take a bank loan to finance your purchase, and what your credit score is.

Unlike a house for a family living, where one might do just 3% of the down payment to buy it, a commercial property will likely require from 15% to 20% of the first installment (depending on your credit score – 720 and above are likely to result in 15%). Do you have such an installment?

You shall find a good place to buy. For newcomers to the market, experts advise not to buy the best or worst options, aiming at the middle – for the sake of optimal price/condition ratio. Surely, the best option would require less maintenance but will devour a larger initial budget. The low-cost option in a bad condition will demand good hands to fix everything up as well as might require many costs to make everything to the good living condition.

Also, if you are a small owner of the first property management, then you shall have good skills in fixing things – from burst piping that destroy the floors to a non-functioning electric outlet or broken furniture. Surely, you can hire someone to do all the maintenance but that’ll devour a share of your profit. According to surveys, owners of 1-2 objects of commercial real estate tend to do all the maintenance with their own hands. Can you do that?

The financial cushion. If you’re taking a bank loan to buy a commercial property, then you shall have a financial cushion for at least 3-6 months of bank payment if your cash flows won’t be enough sometimes to cover the payment. When a steady inflow of money is reached, you shall take 30%-40% of it to form a bigger cushion. A part of that will go to unforeseen events like a roof torn off by a hurricane or a tree fall.

Calculating your margins is the right way of how to start investing in real estate. Don’t think that if you let some apartment for $1,000 a month, this all will be left to you – it is expected to spend from $300 to $700 to operating expenses, insurance, taxes, unexpected costs, and a financial cushion. If you’re financed by a bank, then the sum may spur up to $900-$1300 a month, so you might get a negative cash flow, at least, at the beginning. Actually, having a 4%-6% annual ROI for a beginner is quite good. So, the investments of $100,000 will recoup in 20 years.

Think about the things that come along with the investments in real estate

Renting a house to tenants is a thing that will make you meet various people – good quiet payers and those who will break things down and flush their glossy magazines down the toilet. Are you ready to deal with all types of people, sometimes consuming a lot of your nerves due to quarrels and forming evictions? Also, you will have to know all rules and legislation about renting and leasing in your country and area – including rights and obligations of parties – so as to avoid legal issues and secure yourself.

Inflation and appreciation

Depending on your area, real estate prices go up differently, doubling the cost of real estate each 7-15 years. So, in 30 years of your ownership, the cost of your property can double from 2 to 4 times. Even if you sell it with a discount due to amortization and the real cost of money will be lower due to inflation, you’ll still benefit from 1x to 3x times to the initial cost of your purchase (before taxes) on top of its cost. With 20 years of average recoupment and even 2x addition to the resulting cost after the sale, your $100,000 will turn into around $450,000 in 30 years. If you’re thinking of that long-term investment, operating commercial real estate may be your thing.