For people who are just starting as property investors, investing in real estate can feel like a maze. They know where to enter as well as their desired exit point, but everything else is a puzzle.
Newbie investors can see that there is a lot of money to be made by investing in properties. They also know that all they need to get started as a property investor is to go out and buy an investment property. But as Windermere Management warns, the problem lies between buying the property and making it profitable.
Are there secrets to profitable real estate investing that new investors need to know? Yes, there are, and this post will help you get started on some of the most important ones. Here are the top tips for property investors.
1. Clarify your investment goal
Before you set out to look for a property to invest in, you should ask yourself what you want from the property. There are many options for what your investment goal for a property can be, and the particular goal you choose will define the best real estate investment strategy to pursue.
Your goal can be to save money on rent by investing in a property that you can live in and rent out at the same time. It can be a regular income and long-term value appreciation. It could also be that you want to make small to medium profits in a very short period. Clarifying your goal is the first step to defining your investment strategy.
2. Define your investment strategy and niche
There are several real estate investment strategies, and each one has its pros and cons. The best strategy for you depends on your particular circumstances and needs. Examples of real estate strategies include buy-and-hold, fix-and-flip, long-term rental property or vacation rental, and long-term rental property.
Apart from choosing your strategy, you should also decide your niche. This is the specific property type to which you want to apply your strategy. Examples of property niches include single-family houses, small apartment buildings, commercial retail, etc.
3. Understand what makes a location good
What factors make an area good or bad as a potential location for your investment properties? These are referred to as the area’s fundamentals. They include population demographics (age, income, education, etc.), good neighborhoods, a surplus of local shops and entertainment centers, good road networks and multiple modes of transportation, schools, hospitals, amenities, security, and employment opportunities. Gaining an understanding of the fundamentals will help you make a good decision about the best locations for your investments.
4. Find a mortgage broker who specializes in investment properties
Most mortgage brokers are familiar with residential mortgages, but the process for obtaining a buy-to-let mortgage is completely different from that of a residential mortgage. Using a broker who is familiar with investment property mortgages will help you get the best terms from lenders.
Who your broker is can mean the difference between an application that is rejected and one that is approved. And when buying houses below market value, the speed with which mortgage processes are completed can make or break a deal. This will depend on the experience and connections of your broker.
5. Use interest-only mortgage
When getting a mortgage for an investment property, you usually have a choice between interest-only payments or paying both the principal and interest. Choosing a mortgage that allows you to pay interest only is better.
It allows you to maximize cash flow and equity growth on the property while saving thousands in the mortgage payment. The money saved can be redirected into paying off the mortgage principal on your primary residence. Using interest-only mortgage also lets you take advantage of tax deductions for the interest payments on the investment property.
6. Avoid cross-securitization
This is when your investment loan is secured using more than one property. A common example is when an investor uses their home and the investment property as security for the investment loan.
The problem with this kind of loan structure is that it gives the bank control over properties that should normally not be connected to the investment loan. In the event that you default on the loan, the bank can sell your home. The better way to structure your loans is to split them up by using different banks for your investment property and your home. It costs more, but it is safer.
7. Understand the relevant tax laws
Getting a handle on the various tax laws as they relate to investment properties can be very difficult. Unless you are an accountant, it is highly unlikely that you will know all the small loopholes you can exploit to cut down on your tax expenses.
This is why you should not view the money spent on a good accountant as an expense. It is an investment that can help you make more money from your real estate business.
Written for Merriman.com by:
Tom Flanigan who is the owner of Windermere Property Management in Spokane, WA.
They manage rental properties in Spokane, Airway Heights, Liberty Valley, and Spokane Valley areas.