Many people today are so inundated in the world of ‘Flip This House’ and ‘Property Ladder’ that they never get a truly strong grounding in the basics of owning investment property. Yes, ‘flipping’ houses is a type of real estate investing, to be sure – but ‘flipping’ homes provides you, if successful, with a one – time full taxable lump sum of cash. It fails to provide you with any of the long term wealth – building benefits that rental homes offer, and when done properly, rental property can be a relatively headache free form of real estate investing.
When considering the purchase of an investment home, consider the following guidelines to help keep you on target:
1) It takes more than one home to build truly passive income and garner substantial tax benefits – so plan on making subsequent purchases. Don’t be the guy who says ‘yes, I bought a rental home once’ – you have to make a commitment to having a portfolio.
2) Your location is paramount to having a headache – free investing experience. Only buy in areas where you would feel comfortable sending your spouse(teenage daughter, etc.) to pick up the rent. Not that you would do that, but use that idea as an emotional gauge. If you wouldn’t send your family there, DON’T BUY THERE!
3) Look for properties that have a minimum of rehab. When we have inexperienced clients looking for their first investment home, we encourage them to look at simple cosmetic renovations only at first. If a house needs more than that, STAY AWAY.
4) Get an estimate of the average rents in your subject home’s area by calling other ‘for rent’ signs. Make sure you have enough rent to cover your monthly debt service(Principal, Interest, Taxes, and Insurance). Avoid negative cash flow at all costs.
5) Properties that have better road frontage tend to rent more quickly than homes that are isolated on coves and out of the way places. Consider finding an investment home within sight of a local elementary school – when parents are waiting in line each day to pick up their children, believe me your phone will ring!!! And the more calls you get, the more easily you can screen and place a qualified tenant.
Remember, owning rental properties is not as dreadful as it is made out to be by failed landlords, and you don’t have to ‘play landlord’ to be successful. Investment homes offer four attractive streams of income that are often overlooked by inexperienced or young investors, as follows:
1) Positive Cash Flow: created when you have money leftover from the rent after you pay your monthly debt service.
2) Tax Benefits: created from the tax shelters that exist within investment real estate, including depreciation and expense write offs.
3) Appreciation: Historically, the value of homes have gone up over time.
4) Equity Pay Down: Your loan is paid off slowly by your tenants.
Don’t neglect these important factors when looking for alternatives to your day job. Join me next time in part 2, where we explore factors that make an investment house successful.