Investing in residential real estate can be an extremely wise financial move, especially when looking long term. Before you take the plunge into making an investment, however, it's important to do your homework to ensure you're making choices that have the greatest potential to benefit you several years in the future.
Once you've decided it's time to consider investing, keep the following in mind:
1. Evaluate the property
If the property you're considering is already rented, it will be relatively easy to determine the annual rent you can expect from it. If not, investigate the rent prices of similar properties through real estate offices or websites like Craigslist or Trulia. Once you've made this determination, it's time to estimate what your annual expenses will be. In your calculations, include projected vacancy costs, real estate taxes, property and liability insurance, real estate taxes and anticipated repair costs over time. Use these amounts to calculate your annual net income and the property's "cap rate," or the annual expected investment return.
2. Understand how to profit from real estate investment
When selecting a real estate investment, it's common to consider cash flow as the most important factor. However, it's best to be familiar with the other ways in which real estate investments can be profitable. For example, the property value might increase due to appreciation, the property may be improved to increase its sale value and rent costs may be driven up by inflation. Don't forget to think about all current and future possibilities.
3. Become familiar with leverage pitfalls
Using leverage — or buying a property with little or no down payment — can be a risky investment strategy if the buyer does not take into account factors like unreliable appreciation, high mortgage payments or lack of cash flow. If you are considering using this strategy, make sure you understand the possible risks going in.
4. Understand the different types of mortgages
From an investor's perspective, there are six different popular types of mortgages: fixed rate, adjustable rate, interest-only, zero-down, balloon and exotics. Each type has its own benefits and risks, so it's important to be familiar with each option and take your time making the right choice for your situation.
5. Consider managing a rental property
Becoming a landlord can have various benefits, but it's not for everyone. When considering this option, take into account factors like your personal temperament, your ability to manage repairs, whether or not you feel comfortable selecting tenants and the time you will be able to invest in maintaining the property and responding to tenant concerns.
Just like any investment, residential real estate has its pros and cons. By understanding the market and what will be required of you, it's easier to make the best decision for you.