Are you an investor thinking about getting into real estate investment? Knowing the basics of real estate helps you evaluate the value of a property and assess if it’s worth investing in it. At Grow Your Wealth, we’re aiming to help you with concise financial planning to get the best out of your real estate investment. Here are some basics to help you understand the real estate market and support you with the right investment decisions.
Is it worthwhile to own a rental property?
Understanding the prerequisites
Owning a piece of real estate comes with many risks involving damages that could happen. When you invest your money in a property only focusing on the return from the tenant payments, you might get some surprises. Repairs, renovations are often needed and unexpected.
On the other hand, buying a real estate property means having a significant down payment in the form of a mortgage. This is a huge risk because not having a tenant means that you will have more expenses to take care of. Whether or not you are profiting from your investment, you still need to pay the mortgage as well as the property taxes.
Since you don’t have the flexibility of generating money out of the property if it is not occupied, you need to make sure that you have a backup source of cash flow. It will help you pay your obligations.
Assessing the risks
When it comes to investing in real estate, there are some factors you can not control, such as what’s happening in the market itself and what’s happening with interest rates. But even with these changing elements, you can make a very educated decision to have control.
Having control involves doing your due diligence before purchasing a property. To do so, you need to know what’s going on in the market in terms of the property’s value, to know what has been the trend the last few years and what was driving this trend. You also need to educate yourself about the economic factors in that city or town.
Because a large city is noticeably different from a small town, a well-diversified economy in that city would be different from a one economy mining town. In that way, there is a lot of difference in how the market value will perform. Some recurrent cases of risk-taking from investors is mind shutting. This usually happens when there are new laws or when the town is at the end of its life. It’s therefore important to know about the market value to understand what’s going on in the economy.
Dealing with the market
Another sensible aspect of investing in rental property is the set up of the market prices. By knowing what’s driving these prices, you can then understand who the tenants are by knowing what’s driving them. The quality of your tenants is crucial to getting a good return on investment. You need to know who they are and how they earn their living.
All these pieces of information will help you evaluate what your cash flow will look like. Of course, being able to make an accurate evaluation, you would need to have gotten credible real-time information on what it costs in terms of utilities, eventual renovations and occasional repairing, property taxes, and insurance. All these data are to be known before making any purchase to ensure a positive cash flow. Being able to state your profits after any taxes and expenses is the guideline to determine whether an investment is good or not.
There is also an important point to take in consideration when working on investing in real estate and it’s your worst-case scenario. You have to estimate — if something goes wrong — how many months worth of rent you can go without. This situation generally occurs when a tenant decides to move out early or between switchover of tenants. In the same sense, you also have to consider occasional renovations which could take a month or two.
Getting involved in management
Investing in real estate also includes having some work to do to ensure that everything goes smoothly. It could be talking to the realtors, to the market, to tenants, or even hire a property manager.
It’s important to keep an eye on what’s happening in your property and how your numbers are affected. To help you decide if investing in rental property is worth it, we at Grow Your Wealth, we’ve put together a financial planning template. It will help you to get organized whether you’re analyzing a property you’re about to buy or already own one or more properties. It will help you understand the numbers to have a clearer view on your options.
Renting out a property comes with a lot of research that protects you against bankruptcy. Grow Your Wealth is here to support and advise you during your rental property journey. Feel free to reach out as we offer in-depth analysis in our financial planning services.