(Newswire.net — May 1, 2015) New York, NY — You work hard for your money. Maybe it’s time for your money to start working hard for you. Rental real estate is one way to make your money grow. When invested properly, it can create passive income for you as long as you keep the properties. But investing in real estate does have its risks. Property values can crash. Furnaces can break on the coldest day of winter. Real estate investments don’t come with a guaranteed rate of return. You need to understand what you’re getting yourself into and choose the right investing strategy, the right properties and the right tenants. Here’s what you need to know before you start…
Always Remember the Goal Is Profit
Sounds simple doesn’t it? Unfortunately, it’s not always easy to do, and calculating how much money a rental property can make isn’t straightforward. Your costs fluctuate from one month to the next and property taxes go up every year. Your rental unit could be vacant for longer than anticipated. Always err on the side of caution and build a buffer into your calculations. You don’t want to pay for your rental expenses out of your own pocket every month.
With real estate investments, it’s important for your properties to generate enough return to have plenty left over once you’ve paid the bills – both recurring expenses and irregular costs like major repairs and vacancies. Novice real estate investors tend to only focus on mortgage costs but it’s important to budget in expenses for property management fees, evictions, vacancies, repairs and maintenance, accounting and other costs that often go overlooked.
How Do I Make Money with Real Estate?
There are many ways to make money with real estate properties.
The first is with cash flow. When you get more in rent than your expenses, you have positive cash flow. Maybe you’re clearing $300 per month on your first property; once the mortgage is paid, it may go up to $800 per month. Multiply that by two, five or even ten properties, and you’re well on your way to making plenty of money with your real estate.
A second way to make money is with appreciation. Over the years, your property value may increase. If you buy a property for $90,000 and sell it ten years later for $170,000, you have just made $80,000 in appreciation (minus expenses such as repairs, closing costs and realtor fees). Keep in mind that appreciation is far less predictable than cash flow. Often the market goes up, but sometimes it comes crashing down. If the value of your property plummets, you need to be able to ride it out until prices recover.
A third way to make money is by creating ancillary real estate investment income. This is like creating other sources of income within your current investments. You might have a coin-operated laundry room in your apartment building or offer advertising space in your lobby. Ancillary income is essentially offering new services to your existing clients, your tenants.
Look for properties that have the potential to make money in more than one way. Many sources of income, no matter how small, can become quite significant when they come in steadily every month. Multiply them by several rental properties and all of a sudden they aren’t so small after all.
What Kind of Real Estate Should I Buy?
Your goal should be to find the type of real estate that you understand, that you’re comfortable with and that will make you money. There are many options: from single family homes, to multiplex apartment buildings to commercial space, all can make you money when you take the time to learn the subtleties of that type of investing.
How Do I Finance My Rental Property?
You’ll likely need to save cash for a down payment and then take out a mortgage to cover the rest if necessary. Start by meeting with your current bank to see what they have to offer; they will explain their rules and requirements. But before signing on the dotted line get a second opinion, preferably from a mortgage broker. They can find you the best rate as they shop around for you.
Non-traditional forms of raising capital are also increasingly available, from peer-to-peer lending services (e.g. Lending Club or Prosper.com) to personal loans to joining forces with wealthy partners to raising money from friends and family. You have more options than you think for funding.
When it comes to financing, never try to bend the rules. If your lender(s) learns you gave false information on your application, they can call the loan, which means you would need to repay the mortgage in full. They can also report you for fraud.
Who Can Help Me?
Building a great team of professionals can make the difference between success and failure, and working with a reputable real estate agent will get you started on the right foot. Consider joining a landlord association to keep up to date on the latest developments in real estate laws and best practices, and to network with other investors.
Once you have your first rental, a good property management company is essential if you don’t want to be on call 24/7. Clearly outline your property management’s duties and fees with the help of a comprehensive, signed property management contract.
You will also need several handymen and contractors, for jobs ranging from minor faucet dripping to major roof collapses. Real estate investment clubs or landlord associations can also help you network your way to good referrals on contractors.
The Bottom Line
Don’t get too caught up in the excitement of a new venture. Base your decisions on cold hard numbers, not emotions. Just remember, no one cares more about your money than you do, so focus on your profits.
About the Author: Andrea enjoys spending her time writing about the issues closest to her heart, including home improvement, business and youth alcohol/drug addiction. Follow her on Twitter@ https://twitter.com/jones05_a