January is full of people making big changes and following through with new year’s resolutions. A lot of those resolutions are financial, and real estate investment is fast growing in popularity. Although investment can be daunting at first, anybody can become a profitable landlord in 2018 with the right direction.
- Choose between long-term rental yield or short-term house flip
- Investing long-distance is easier and safer now with new technology
- Conduct a full cost-benefit analysis prior to purchase
- Avoid common financial and legal pitfalls
The first step towards profitable real estate investment is formulating a solid strategy, according to Rick Sharga, chief marketing officer at Ten-X. First off, it is crucial to decide on a type of investment. Most landlords choose between long-term rental yield or short-term profit from flipping houses.
“Most people focus on buying property cheaply, but if you plan to become a landlord, then price is less of an issue. In that case, cash flow is most important, and you want to buy something that will be ready to rent quickly and for more than your costs,” Sharga told the Washington Post.
Advancements in technology and emerging investment platforms are also making long-distance investing a considerably more tempting option.
Invest locally or long-distance – The truth still holds that successful real estate investment requires a deep understanding of the local market. Most casual real estate investors gravitate towards managing properties within one hour of their home, merely for convenience. Local markets, however, are not always the best option for casual investors.
“The yield is what matters with real estate investing, and if the property prices are too high or the rent isn’t high enough, you can’t get a good return,” says Greg Rand chief executive of brokerage OwnAmerica. “For many people, that means investing in a place that they are semi-comfortable with, such as a place where they have vacationed or have some kind of connection.”
“it’s important to talk to a Realtor who can give you advice about the neighborhood and what could impact it, such as businesses moving in or out and plans for public transportation,” added Dave Hawkins, managing broker of McEnearney Associates in Alexandria.
Crunching the numbers – Do the math before making any monumental decisions like purchasing a property. A detailed cost-benefit analysis saves plenty of stress down the road and helps investors make educated decisions based on potential returns on interest.
To conduct a cost-benefit analysis, “start with an estimate of the annual rent, minus 5 percent for anticipated vacancies,” Rand explains. “Then subtract all expenses, such as taxes, insurance, homeowners association dues, property management fees and maintenance costs, estimated at 10 percent of the gross rent to generate your net operating income.”
The return on investment is the net income, after all operating costs, divided by your mortgage payment. “For example, if you purchase a $100,000 property and your profit is $6,000, then your return on your investment is 6 percent. If your property goes up in value, then your return on your investment is even higher,” according to the Washington Post
Property Management – Hands-on property management is not for everybody. “You need to have the right attitude to be a landlord,” Hawkins says. “It can be a hassle and inconvenient, so if you want to avoid that, you should hire a property management company.”
If you still want to handle things personally, prepare yourself for hours of frustration caused by inexperience. There are many hard lessons to learn, but heeding expert advice will ease the pain.
Common property management pitfalls, according to the Washington Post:
Being over-leveraged – “If your mortgage is too high and the rent barely covers your expenses, you could lose money if your tenant doesn’t pay one month. Rand recommends keeping 10 percent of the gross annual rent in a separate account for maintenance and reserves.”
Frequent vacancies – “Turnover is the fastest way to fail, Rand says. Landlords need to screen their tenants to make sure they have the means to pay the rent and good credit.”
Chasing too-high returns – Expect modest returns in the mid-single digits. “This is a get rich slowly proposition,” Rand says. “It’s better to buy a quality home in an area with good schools where people will stay longer.”
Thinking short-term – Do no jump the gun and immediately sell if the market takes an unfortunate shift. “If you don’t have too much debt, you don’t need to worry about selling even if the property value declines. Keep in mind that even if home values drop, rents usually don’t,” Beasley says.