You’ve probably known someone who at least makes some extra money on the side by renting out an investment property, such as a land, housing, or an apartment to others. Being a landlord can be a highly profitable business because an investment property can generate a handsome income while simultaneously rising in value. It’s been the path to wealth for countless individuals and companies, but you must do it in a way that suits your personality and lifestyle.
If wealth and financial security is something that appeals to you, one of the first things you need to consider is whether you’re the type of person who doesn’t mind getting his hands dirty. In this case, you may decide to buy a fixer-upper. Such an investment property comes at a discounted price, and by making the necessary improvements yourself, you can add great value to the property in a short amount of time.
DIY or Not
Of course, you don’t need all the skills necessary to make these sorts of improvements. In fact, it’s rare that investors do everything themselves. Your active part might only be hiring qualified tradesmen. Having a trusted network of such professionals can save you a lot of money on repairs, but such an approach still requires you to be involved in the renovation.
If you want to assume a more passive role on the road to wealth, then you can always buy a property that’s ready for occupancy and just provide the capital (assuming you have it), or you can make a phone call to a trusted general contractor. In such a case, you supply the vision, and he‘ll take it from there.
Reach the Goal Line
Your goal as a landlord should be to generate a profit on your capital, so it’s imperative that you determine the capitalization rate before buying an investment property. This cap rate measures the return on investment (ROI) by dividing the expected annual rental income by the purchase price plus any improvement expenses.
The higher the cap rate, the greater your potential ROI, but this may also be a signal of increased risk. The Local Market Monitor sells a cap rate report for $65 which covers 315 different housing markets in the U.S. This is an excellent resource for any potential landlord. Your independent mortgage lender also can give you good advice about the cap rate.
Other Considerations for Investment Property
When choosing an investment property, you must learn to think in terms of “location, location, location.” For example, if you plan on being a hands-on landlord, the property should be near your place of residence or at least an easy commute away.
Regarding the location’s rentability, consider the local economy, the general business environment, and the demographics of the area. Other considerations include:
- What sort of renter are you seeking?
- Is there enough employment in the area?
- Can the local wages support the rent you’ll need to receive?
- Are you willing to allow multiple renters to occupy one dwelling?
Lastly, when searching for an investment property, it’s usually worth your while to investigate any possible deals in the area. You might be able to obtain a steep discount by taking advantage of a foreclosure, an REO (real estate owned/bank owned) property, or a short sale (lender takes less than the payoff of an owner’s property). It may be easier when you have a trustworthy advisor like Zachery “Zack” Adam of GoPrime Mortgage, Inc. . (dba PrimeRate Mortgage Lending) on the paperwork when you’re bargain hunting for such properties.