Making the decision to invest in residential real estate is a very smart move, but only if the homes you decide to invest have good potential for profit and fit well within your plan for success. For those who are new to real estate investing, however, there are also considerable risks involved. If your are preparing to purchase your first rental property and want to minimize these risks, here are three things you should consider.
The initial cost of the home is critically important
Rental housing creates profit by bringing in monthly rental income. This means that when making the initial purchase, the price paid for the home must make it possible for the home to generate a reliable stream of income. If the home is purchased at a price point that is too high, the rental income it generates is unlikely to be enough to cover the mortgage, taxes, and insurance costs, along with at least a nominal profit for the investor.
Instead, investors who want to be successful will choose to purchase homes at lower price points, such as those that have some minor condition or repair issues. Once the home has been restored to good condition, the rental income is then better able to cover all the expenses of the home plus a reasonable amount of profit for the owner.
Make sure you understand the rental market in your area
Understanding the rental housing market in your area is also an important part of becoming a successful investor in real estate. Since families tend to look for rental property near their work, schools, or other family members, take time to determine what the average family in the area is looking for in a rental home, including:
- popular rental price ranges in the area
- number of bedrooms/bathrooms usually desired
- streets or neighborhoods with highest and lowest numbers of vacancies
- all applicable building codes and rental housing regulations
Once you have taken the time to learn what the typical tenant hopes to find, you can apply this information to the homes you are looking at to help you determine which will work best for your situation.
Work with and learn from a professional
The most important thing to know when buying residential real estate for the first time is find and partner with a real estate expert who can help you search for homes for sale and learn the ropes. For most new investors, this professional is likely to be a real estate agent who has experience in helping investors buy, sell, and manage rental homes. By doing this, a new investor will be able to take advantage of the agent's local market knowledge, as well as their contacts within the construction trades and lending community to help them build a more successful residential rental business.