If you’re thinking about how to make your next big investment, you’ve probably considered investing in real estate. Property investors make their money by buying real estate with the expectation it will increase in value over time, and usually monetize their investment properties by renting them out, whether they’re commercial or residential properties. After the value of an investment property has grown considerably, it can be liquidated, but property investors will often hold on to a piece of real estate for much longer if it generates enough rental income every month.
Property is considered a good investment, and a safe one, since the price of real estate generally trends upward and because land and housing are resources in constant demand. But investing in property isn’t as cut-and-dry as investing in the stock market; there are some pitfalls to be aware of, and also some handy tips to help you along the way. Here are some things you might not know about being a property investor and making money from renting.
1. The upfront investment isn’t as high as you think it is
Many prospective investors, especially those on the younger side who aren’t totally financially established, rule themselves out of the property game because they think the initial investment must be too high. After all, the median value of homes in many US markets is well into the hundreds of thousands. Who can afford that, and how can you even consider that a wise investment when rent is only netting a few thousand every month?
In reality, you can put your investment property on a mortgage just like you would a house you live in. While interest rates for investment properties will be a bit less advantageous than they would be for a primary residence, there’s still a huge difference between putting down $20k on a home and putting down $120k.
2. You can make fractional real estate investments
Even the down payment on a mortgage is high enough to put many up-and-coming investors off, but there’s still hope for those of us who want to enter the real estate market without the necessary startup capital. Another way to get around the seemingly high entry price of real estate investing is to invest fractionally.
Just like with the stock market, it’s now possible to purchase a fraction of a piece of real estate, watch that fraction grow in value, and eventually liquidate it. You’re even entitled to a proportionate fraction of the property’s rental income. It’s never been easier than now to get your foot in the real estate door.
3. There are probably more expenses than you think
Unfortunately, being a property investor isn’t as simple as buying a home, renting it out, subtracting your mortgage from your rental income, and keeping the remainder as profit. Owning a rental, just like owning a home to live in, will incur various regular and irregular expenses, and those expenses should figure into your investment plan.
First, your regular expenses. You’ll be paying a state property tax every year, which is different in every state. On top of that, you might be paying fees to a homeowner’s association if your property belongs to one. There’s also the monthly payment to your property manager.
Then, there’s the rest: the cost of repairs, the cost of appliance replacements, the cost of utilities if you plan to include them as part of the rental, and the potential cost of your property sitting vacant for any period of time. Don’t forget about the initial inspection, closing costs, and the cost of rental permits in applicable jurisdictions.
It’s far from impossible to make money with all these fees in mind, but it’s better to be aware of them than not!
4. You’ll want to hire a manager
In the previous section, we mentioned your property manager. Your property manager might be a person, but they also might be a fully staffed, fully equipped management firm. No matter who it is, you’ll most likely want to hire one, because being a landlord and manager of a property is too much for most to handle. Think about it: do you want to be available 24/7 in case of emergency maintenance, or deal with every little tenant issue that pops up, including showings, background checks, and applications?
“A real management firm will take care of everything from replacing a broken refrigerator to advertising your vacant property,” says Pete Evering of Utopia Management. Property managers can basically do every possible job necessary for the efficient operation of your rental, even handling monthly payment processing. You definitely don’t want to go this journey alone, so get all the help you can from a qualified manager.