If you are considering becoming a real estate investor, it is important to understand what you are getting into. This article helps you decide if becoming a real estate investor is for you.
Due to market changes, the real estate investor will have to hold the properties he or she acquires. Therefore, it is very important to understand what that may mean.
Determine If Being a Landlord Is Right For You
Once you determine that being a landlord is right for you understand the market, learn the climate of the rental community, learn the neighborhood or neighborhoods that the potential income property is in, and understand your finances including the vacancy rate. Then, the investor is ready to find an income property.
Know Your Finances
First, we will discuss understanding the investor’s finances. The goal of the income property is to produce income. In other words, the property must cash flow. To determine if a property cash flows, the investor must know the property taxes, the mortgage amount, maintenance cost, insurance cost, the fair market rent, and the repairs needed to make the property livable.
The property taxes, mortgage amount, insurance, and fair market rent can make or break the income potential of a property. How do you ask? The latter items with the exception of fair market rent must be paid by the owner whether the rent is collected from the tenant or not that is why the vacancy rate must be part of the investor’s calculations in determining the income potential of a piece of property.
Let’s look at the math.
As an investor looking at the math is just as important and in some cases more important than finding the property.
There are options that the investor must consider if he or she is financing the property. One option that an investor may choose is a hard money lender.
In order to determine if this is the right choice for the investor, I found a math calculator that will help with minimizing the risk of this type of loan. Remember, the interest rate on this type of loan can be very high.
There is an advantage to this type of loan. The advantage of this type of loan is that the investor can get immediate cash or access to the equity of the property. This loan, however, is often used if the investor needs to rehab the property after purchasing it.
At the time of purchase of the property that needs rehabbing the investor will need to determine what the after-rehab value is for the property. The reason this is important is that the hard money loan will yield a 65% to 70% loan to value for the investor.
For example, let’s say the investor found a property for $35,000 and the after-repair value is $90,000.
The loan amount will be $58,500, so the investor will have $23,500 for the rehab. The available amount for the rehab needs to be determined before purchase so that the investor can determine if the project will possibly yield the income or value that the investor is expecting after the rehab is complete.
Once the potential amount of funds for the rehab is determined the investor needs to get estimates on the rehab to determine if the amount available is enough to complete the project.
It is important to note that all of this research needs to be completed before purchase. In an effort, to prevent the prospective property from not being sold before the investor completes his or her research, the investor would need to have his or her contractors available at the time the potential property is considered for purchase.
The contractors would give the investor a rough idea of the amount needed for the rehab. Of course, most properties that the investor would consider will not have utilities on, so the investor needs to add an additional twenty percent to the final estimated rehab amount to cover possible unknowns.
Once the investor deems that the property is a good investment then the investor purchases the property. However, to reduce the investor’s financial risk the investor must also determine how long the rehab will take and when the investor will realize an income if the property is an income property or buyer if it is considered a flip property.
The math consideration does not stop at determining the type of financing, the investor also needs to consider the holding cost. The holding cost is interest, property taxes, insurance, and utilities.
Another aspect of examining income property is making sure that the investor is abreast of all the changes to the market, the neighborhood, and the laws.
Changes in Laws that Affect Investors
Due to the shift in the real estate market, it is more important than ever to keep abreast of changes in the financial world, the neighborhood, employment, etc. There are several changes recently that have affected real estate investors, so it is important to be abreast of the industry.
ABOUT THE AUTHOR:
Renowned speaker, co-author, real estate broker, and owner Serena Brown has astounded the literary world by co-authoring her first book.