At some point in our lives, we begin to think about ways to have constant cash flow and if you have ever been interested in real estate, then rental properties have probably come to mind. To make the decision on what type of real estate investment to make, you need to understand every tiny details and ask all the necessary questions. Here are 10 questions before buying a rental property.
- 1 Is real estate a good investment?
- 2 What type of property will I buy?
- 3 How will I finance the purchase?
- 4 Where should I buy my rental property?
- 5 What is being built nearby?
- 6 Who will manage my rental property?
- 7 What is the property worth?
- 8 Capital gains or rental returns?
- 9 Are the documents in order?
- 10 Who is your target market?
Is real estate a good investment?
While the answer is personal, it may help to know that the potential benefits and rewards of owning real estate are high. Here are a few reasons why:
a) Appreciation. We know a used car is worth less than a new one. But while cars and most other belongings tend to depreciate over time, real estate tends to appreciate. A home you buy for N25,000,000 today may be worth N35,000,000 in just a few years. Of course, there’s no guarantee that home values will continue to rise, but historically, real estate has been a sound investment.
- You also have some control over the appreciation of your property: you can maintain it well and even make improvements and renovations, leading to increased value.
b) Cash flow. Once you have reliable tenants, rent checks will start coming in. If all goes according to your cash flow plan, which it should, you will be making more each month than you’re spending.
When you compare real estate investments to other options, such as stocks, make sure you take all of the risks and benefits into account; if you look at expected returns alone, you won’t have the full picture.
Deciding to buy and manage rental properties is not something to take lightly. Once you’ve taken a serious look at the reality of rental ownership, you might be excited to get started or decide to take another path.
What type of property will I buy?
First and foremost, you must decide whether or not you will live on the property. If so, a duplex or multi-unit building will be necessary.
There are some advantages of living in your own rental property. For one, you’ll be able to save money on paying rent somewhere else and choose to use the money for other things like buying another property. Second, you can ensure that your property is being used properly.
How will I finance the purchase?
One of the benefits of owning a property is the ability to use leverage — sometimes known as OPM (Other People’s Money). If you take out a mortgage, you may be able to pay off the loan and gain full ownership of the property in a couple of years.
Even if you have enough money to buy your property outright, it may make sense to keep that cash liquid and take out a mortgage.
Where should I buy my rental property?
If you plan to handle maintenance and odd jobs yourself, you’ll need to look in or near your current community. But if you plan to outsource the day-to-day operations, you have many more options.
You will find many lists online indicating the best cities and markets to invest in, but it’s important to do some research yourself and understand what makes a community a good bet for your investment.
One factor you’ll want to consider is the appreciation rates in the community over time. As with stocks, it’s best if you can buy low and sell (or rent) high — but as with stocks, there is no guarantee that prices will continue to rise. The best you can do is look for places where prices have been increasing steadily.
It’s also important to look at what factors are driving that growth. Is the population growth in the area due to new businesses that have moved in? Are more people moving to the city? How much new development is there in the area? Go to the local area and do research to see what it’s really like. Check out the shops, and the retailers, and assess the residents, demographics, crime rates, employment, transport, facilities, schools and other factors people typically look at when buying a home. These are the same things your tenants will be assessing when renting from you.
What is being built nearby?
Any new infrastructure project can change an area completely, both positively and negatively. Do your research to find out about development and infrastructure plans in your area and when they will be completed. Once you know what is being built, do some research to see how similar projects in other areas impacted property values, and demographics and decide if it’s right for you.
Who will manage my rental property?
One of the things that make rental properties so attractive to investors is that you can keep your net profits and you don’t have to share them. But one of the things that make rentals unattractive is the amount of work involved in being a landlord.
If you don’t want to deal with all the hassle of managing tenants, collecting rent and doing maintenance, you might want to hire a property management company. The downside is that the management company will take a significant amount of the rent.
It’s important to find a company you can trust, so consider reviews, interview multiple companies, and talk to their references. A lower rate might be tempting, but consider whether it’s worth paying extra to avoid the headaches of a less competent company.
If you choose to manage the property yourself, one of your first tasks will be to find tenants. You’ll want to list your property so renters can find it. Make sure to screen all potential renters; some options are interviews, background checks, and credit checks.
You will need a legally binding lease for your tenants to sign, which may mean working with an attorney. You’ll also need to collect a security deposit. Read more tips for first-time landlords here.
What is the property worth?
To determine the true value of a property you need a property valuation. A property valuation can be different to the selling or market price set by the agent. An assessment by an independent and certified valuer before buying or selling can help investors negotiate the best price, reduce risk and save money.
Capital gains or rental returns?
Why are you investing? Is it for rental returns or capital gains? Rental income will help you hold the property but it might not increase in value as quickly to help you buy again. Capital gains will increase in value quicker allowing you to buy your second and third properties sooner. If you look at the high rental return and low capital growth, you’ll be sitting there a long time before you have any equity to do something else. Be clear on your investment strategy.
Are the documents in order?
You don’t want to get stuck in a legal case that has to be with fraud, corruption or even money laundering. So before buying a rental property you need to make sure the property is legitimate and has all the necessary documents in case of a search by law enforcement bodies.
Who is your target market?
Identify your potential tenants and know what they would be looking for in a rental property before you buy. If you’re looking at a property in a university area, you should be looking at a multiple-occupancy home near transport and amenities. If, on the other hand, you’re going for the family market, look for a large home, with an area for kids to play and families to host friends and family.
Investing in property can be exciting plus a great way to increase your wealth and cash flow, but you must ask the 10 important questions before buying a rental property in order to avoid going into something you’re not prepared for.