Can't miss “Flip This House”? Waiting for “Masters of Flip”?
For investors who think that investing in real estate is a piece of cake, you have to know certain things ahead. It is not as simple as purchasing the first nice house you see.
Be cautious of reality TV shows that depict flipping houses and investing in real estate as sure ‘money-makers'. The challenging reality is starkly different from the TV shows.Right before jumping in, It's good to pay attention to the following factors:
1. Condition Of The House
You might get a real bargain when purchasing a house that needs a ‘little fixing.' However, you should realistically consider the amount of money and time you would need to make the house attractive.
You should get a professional to make a thorough inspection of the house. After that, sort which repairs you can do on your own and which ones need a contractor. Then, get several estimates for any major jobs that you need to outsource to professionals. This way, you can see how much more money you need to sink into your investment.
Fix the important issues
Make sure that you've fixed all the serious issues in the house before you let any tenant move in. The issue of safety is of utmost importance here. If your tenant becomes hurt, sick or injured because of an unsafe house, it can lead to huge losses.
Carefully calculate how long it will take to fully repair the house. If it's going to take several months, think if it's still worth buying. After all, while the house is under repair, you'll be spending money and not earn anything from the property.
2. Location, Location, Location
In a real estate boom, buyers will scoop up any house that opens in the market. This is really great while it lasts. However, when the smoke clears, the winners will be the buyers of the houses in the best locations. These properties will depreciate in value a lot slower than the rest. Obviously, the home's location has a lot to do with it.
There is more than a single factor to consider:
You can live in a not-so-handsome house if you love the area where it is. All the other things you can somehow change – the landscaping, the paint job, the driveway, etc. However, you're forever stuck with the location. A good house must be close enough to work areas, must have easy access, built correctly on its lot. It should be in a quiet neighborhood, not in a traffic-jammed area with access to parks, schools and public transport. You should also consider whether it's good for families with young children or pets or senior citizens.
A “good location” is a popular term but realistically, it's hard to define exactly. Each prospective buyer and tenant has a different need and criteria in choosing a house. Nevertheless, there are certain subjective factors to determine a home's real value. Given your personal needs and preferences, you might now be able to buy a house that satisfies all the factors. That's really OK because you should consider a home much more than just an investment. However, when you are buying a property, it is best to keep the subjective factors in mind.
3. One Percent Rule
Every investor has his own financial targets or objectives in renting out a property. Most of them still try to follow the ‘one percent rule.' It guides property owners to see if the monthly rentals would exceed or approximate the monthly amortization.
An investor purchases a rental house for $100,000. Applying the rule, he should get at least $1,000 per month in income. A simple mathematical computation would give this figure ($100,000 x 1% = $1,000). You should only purchase a property that can bring you at least a 1% income on the cost of the property. You can always use an advanced rental property ROI calculator to know your property return.
The only exception is if the property is in an area that is rapidly changing and improving. In such a case, property values and rent would tend to appreciate remarkably in a short period.
4. Property Taxes
You must always be mindful of the tax implications of owning a rental property. High taxes will decrease your net income – more so if you have to pay penalties. A property with low taxes, on the other hand, allows you to keep more of your monthly rental income.
As a general rule, metropolitan communities warrant higher taxes compared to rural communities. Even the more advanced and developed metropolitan suburbs have different rates of taxes among themselves. All of them charge comparatively higher property taxes.
Some locations even charge different rates of tax for owner-occupants against investors. An investor would generally have to pay a higher tax in these areas. It is best to call the local tax assessor for an accurate assessment of the local taxes.
Remember that even if you find your dream house in a ‘perfect' neighborhood, a very high tax is not good. Eventually, it may be a poor investment choice.
The house, by itself, is really important. However, the area where it is located is sometimes even more important. You need to choose an area that appeals to your prospective tenants.
Would they want to live in this neighborhood?
Tenants are always looking for a safe neighborhood. You should look at the safety factors, more specifically if the crime rate in the area is not high. Curb appeal is also of severe importance. A street that's lined with nicely painted houses, well-maintained lawns, and beautiful trees would really stand out. Tenants would love to live in such a street.
If you are targeting to rent to families, make sure that it belongs to a good school district. If there are highly ranked schools within the area, it will have more appeal to families wanting to rent.
6. Age Of The Property
Age does matter when it comes to buying a property. Buying an older house is not necessarily a bad idea. Old and new houses have their own advantages and disadvantages.
Do old homes bring back some of your good memories? How about one with a quaint old-school dumbwaiter that goes up to the master bedroom? How cool would a house with a concealed servant's staircase be?
These are the unique charms of old houses that you can still find in the market. However, remember that it is obvious that older houses require more care and maintenance than new ones.
If you don't care much for the old world appeal, new houses would appeal more to you. Do you have a use for big walk-in closets? Would you care for a jacuzzi right inside the master bathroom? Have you been dreaming of voice-activated lights? If so, then modern houses would be your choice. Buy in while the house is still under construction, so you can put in all the features that you want.
7. Insurance Cost
This is another expense that, if you don't manage properly, can lessen your income. Before you buy the property, make sure how the insurance will play out in the scheme of things.
The first decision you need to make is the type and amount of insurance you want for the property. You have the option to pay lower monthly premiums but have a higher deductible in case you claim. Do you also want coverage for your tenant's properties?
The second step is to find out if the area you are interested in calls for higher premiums. This may be so if it is prone to floods, wildfires, sinkholes, tornadoes, hurricanes, earthquakes and other calamities. If any of these has a very high probability of occurrence, you may want to reconsider.
As soon as you're ready to go, shop for the best insurance rates. You can check the insurance companies' websites for their products and online calculator. However, it is still better to talk to a customer service representative to get a more customized quotation.
8. The School District
If your tenants have school-age children, they will be particular about what school district the house is in. Obviously, an area with many highly ranked schools will be more preferable. Should there come a time when you want to put up the house for sale, this factor would help raise the price.
Parents place high importance on good education. If your house is in an area within a reputable school district, its value is higher. You may have to pay more because of this but you can always charge a higher rent. This will allow you to recover the extra you've paid through the monthly rental and when you list it for sale.
It is a good idea to keep track of how the schools are doing. It will be to your advantage if they keep their high-level standards. Also, it will also make your investment's value higher.
9. Property Management
How serious are you about being a landlord? This is not without its share of crisis situations. Your tenant may rouse you from sleep at 2:00 am because of a leaky basement pipe. A lot of things can go wrong in the house at the most unholy hour.
Many investors get a property management company to avoid headaches like this. The property manager will take care of problems related to the house. The going rate for this service is around 10% of the monthly rent. The good thing about this is that it often includes procuring tenants for the property. Some companies also offer the supervision of maintenance repairs from outside contractors as an added service.
Some landlords believe that having a property manager is worth the extra cost. Other landlords think they can save money if they deal with these problems on their own. It all depends on your personal choice so think this through.
10. Crime Rate
Be cautious of houses offered at rock-bottom prices. It could mean that they are in a crime-ridden area. As a good investor, you also have to check the crime rate in each area you're looking into. The good news is that this information is mostly available online so you don't have to go police precinct hopping. Websites like MyLocalCrime.com can provide you with information on any recently reported criminal activity in the area. A high incidence of crime in the area will definitely weaken your bargaining position to ask for high rent.
Don't be shocked to find that many areas have high crime incidents. Generally, crime happens everywhere and anywhere. If you see many reports of petty crimes, like theft or vandalism, it means that the neighbors are vigilant. They really report these incidents to the police.