You’ve found the property. Now what? How can you know it will be profitable? What are the four top basic tips you absolutely must know before investing?
1. Add up [tag-ice]rents[/tag-ice], mortgage and interest
Will you be taking in more than you will be spending? That’s about as simple as it gets, yet there are amateurs who sometimes ignore the main math. They fall in love with a property emotionally and forget it’s still a business.
That’s not to say you can’t have a negative cash flow for a while, just make sure it is not for too long of a while. If the property will be draining you, it’s a dog.
2. Figure in taxes, insurance, maintenance and management
This is your second tier of expenses. There is nothing you can do about [tag-tec]taxes[/tag-tec] and you certainly shouldn’t skimp on insurance. Those are two of the biggest costs. Consider it the price of doing business.
But you can certainly look around and get the best insurance deals. There are small things which please insurers that you can do to mitigate costs. Small details can add up to big savings over time. Get an agent you can work with.
As far as [tag-cat]management[/tag-cat] is concerned, you can do most of that yourself for a short time. Later, you can sub management duties out as your property portfolio grows.
3. Know that property’s history
Okay, this is not always possible, but if you can get the [tag-cat]rental records[/tag-cat], look them over closely. You should know what has been going on in the property for the last three years prior to your purchase.
If it’s a duplex, for example, observe what each tenant was paying. Of course, you can often turn a non-performing property around, but for loan purposes a bank needs to see positive cash flow.
4. Check out the neighborhood
Not only are you investing in one property, you’re really investing in a neighborhood. Trends or trouble will effect your [tag-cat]investment[/tag-cat] almost as much as your tenants. In fact the type of tenants attracted is, more often than not, determined more by the neighborhood than the property itself.
See what other landlords in the area are getting for their rents. Know where the rent ceiling is now and how high it can be raised in the future.
If vacancy rates go as high as 25% you’re still okay, but if downtime goes beyond that you could find yourself in the red.
Once you’ve established the neighborhood and property have excellent possibilities you’re good to go. Now’s the time to go out and buy in many areas. Good luck and good hunting.