Some people get into real estate investing because they see it as the closest thing to a risk-free investment as one can get. While it can be a profitable endeavor, it can also be very risky. Let’s try to understand how the market works. Never forget the recession, and the sayings floating around just prior to it such as “you can’t lose with real estate.” Here are just a few rules to keep in mind so you can have a positive experience with your first real estate investment.
Never Forget the 20% Rule
While it may not be possible every time, do your best to buy property at a price that’s at least 20% below market value. In doing so, you start off ahead of the game with equity already invested in the property. This may come in handy later, if you need to refinance or apply for a home equity line of credit (HELOC).
Vacancies Are Not Good Signs
If you’re looking for rental properties, be sure to pay attention to the rate of vacancies in the property and surrounding area. A high vacancy ratio of 20% or more indicates a problem that may cost you. Typically, if the vacancy ratio is more than 5%, you may have difficulty finding tenants. Conversely, a very low rate indicates that rental costs may be below the norm. This could present an opportunity to raise the rent.
Don’t Expect to Pay Out More Than Half on Expenses
By expenses, infer that to mean any cost other than the mortgage. These include the cost of vacancies, repairs, etc. If you expect to spend more than 50% of your rental income on these expenses, consider this a bad investment and move on. You’re better off finding a different property.
There’s Also the 1% Rule
This rule states that you shouldn’t charge less than 1% of the purchase price for rent. For instance, if the property was bought for $140,000, each unit should rent for $1,400 per month. That’s the minimum. Some real estate investors apply a 1.5% or 2% rule, because it maximizes cash flow. However, depending on your location and the demand for rental units, a higher ratio may not be feasible.
Real estate investing can be fun and profitable, but it also requires smart thinking to protect against and offset risk. By weighing your debt against your probable profit, you can determine the difference between good investments and poor choices. Remember, there will be other opportunities, so don’t rush into any investment. Trust your own judgment. Although I don’t teach real estate investing personally, I can point you in the right direction towards some of the best coaches in the world. Ask me if you are interested.