As you prepare for retirement, buying an investment property can be one of the best ways to save your money. Compared to investing in stocks or bonds, buying land gives you a physical property that will always be there. Not only does land tend to increase in value over time, but you can also make money in the short-term by renting.
As promising as investment property can be, real estate is still a business, and like any business, it requires careful planning. The following tips will ensure that your property is a safe, lucrative investment:
Location, Location, Location
The first step to buying property is deciding where to buy it. There are three main factors you should consider when choosing a property:
Price: This refers to both the retail price on the building and maintenance costs. All things being equal, the less money you have to spend on your buildings, the less you will have to charge your tenants to turn a profit. Don’t just select the first cheap property you find, however; make sure you know why it’s cheap. If it’s because the building is damaged or obsolete, don’t buy it unless you’re willing to spend money on improvements.
Workforce: You can’t turn a profit on real estate unless you know who will be buying or renting from you. You don’t want to rent to people who work in volatile industries. No matter how hardworking, honest, and reliable your tenants may be, sudden job losses could leave them unable to pay their bills, depriving you of income. You should thus avoid owning property in cities with high or unpredictable unemployment rates.
Knowing your tenants’ jobs is also essential to figuring out how to turn a profit when it is possible to do so. Soldiers, for example, often have to move around a lot. If you rent to soldiers, you should focus less on offering them incentives to live with you long-term and more on advertising, so that you can get new tenants as soon as your old ones leave. Factory workers, on the other hand, tend to stay in the same place for a long time. If you rent to factory workers, focus on offering them benefits the longer they stay with you.
Services: Never buy property in areas that lack access to food, healthcare, entertainment, and other amenities. Living with you should make your tenants’ lives easier. When you buy a property, make a list of all the grocery stores, hospitals, schools, government offices, and gas stations nearby, and give that list to all prospective renters.
The Difference Between Buying an Investment Property and Buying a Home
If you’ve already finished paying off the mortgage on your own house, you may be tempted to think that you can handle an investment property just as easily. In fact, there are different financial and practical rules for investment property; make sure you understand them before you invest.
Most banks distinguish between home loans and investment property loans. The specifics of each type of loan vary, but in general, investment property loans are more difficult to get. If you do qualify for such a loan, you’ll have to make a larger down-payment, pay more interest, and follow a shorter repayment schedule. The only exceptions apply to property owners who don’t rent out their properties. If you buy a house only to fix it up and sell it for a higher price later, and you can prove that you live in the house part of the year, you may be able to get a second home loan.
In addition to financial difficulties, owning an investment property also entails greater responsibilities for you as the proprietor. As a homeowner, you can decide on your own when to make repairs and improvements to your building. As a landowner, you’ll have to follow the whims of your tenants. If they call you at 3 AM claiming that their water isn’t working, you’ll have to deal with that problem then and there. Fail to do this and your tenants will find somewhere else to live. Worse still, they can sue you for violating housing codes. Before you buy an investment property, come up with a plan to provide your tenants with the service they need as soon as they need it. Look up electricians, plumbers, and carpenters who live near your property and select the ones who do good, quick work and are willing to operate at all hours of the night.
Hiring a Manager
If you can’t handle being available to your tenants at all hours, another option is to hire a professional manager to deal with them for you. Find someone with experience negotiating with renters and coordinating repairs and updates. You’ll have to give this person a salary, usually worth about 10% of your revenues, but you’ll save yourself the stress of talking to tenants at all hours. Better still, if your manager is good at their job, they will decrease the cost of repairs and attract more tenants, more than making up for the cost of their salary.
Making Improvements
Regardless of the property you buy, you will eventually have to improve it. Be sure to do so in a way that is appropriate for your tenants. If you usually rent to people at low rates and/or for short periods of times, there’s no need to provide them with luxurious benefits. If your tenants pay higher rent and stay longer, however, they should get what they pay for.
Florida Capital Bank is proud to offer the resources and advice you need to make sound investments. Visit our website today to learn more about succeeding in the financial world.