Has anyone ever told you that investing in rental property is easy? Yep, just buy a property with no money down, wait a year and then sell it to the next person in line for a hefty profit, all while collecting monthly rent checks and not getting your hands dirty. Sounds great – ok, my article is finished, finito. But wait, there’s one small fact that’s missing from that prior advice – right, it’s called reality, oops!The Status of the Real Estate Market TodayThe days of getting easy financing from lenders to buy investment properties that experienced double-digit annual appreciation have come and gone. The real estate landscape is currently correcting itself to get back to normal, where the number of buyers in the market equals the number of sellers. Although corrections can be painful, fortunately they don’t last forever. In the long term, they provide market stability and opportunities for buyers. And this is actually healthy – it’s the markets way of applying the brakes to keep the train on the tracks.Today, as a rental property investor, you’ll need a solid base of knowledge on the subject to be successful, especially in this challenging real estate and economic environment. Knowledge of the business will “let you know what you’re getting into” so that you can avoid potential problems and investment mistakes.Basically, making smart rental property investments involves taking the following steps:
Evaluate your employment situation: First and foremost, the stability of your job and income stream is a key factor that reduces your real estate investment risk. How stable is your industry, employer and the economy in your area? If you were to lose your job tomorrow, how long would it take for you to find suitable employment again? Could you collect unemployment benefits if you were laid off, and for how long?
Take inventory of your current financial status: Getting your financial house in order and paying down credit is needed to qualify for lender financing to purchase property. As a result of the “sub-prime” lending mess, lenders have tightened their belts with stricter qualifying standards for borrowers. You’ll need to have enough money saved for a down payment. If not, you’ll have to develop a disciplined budget and savings plan to accumulate the necessary funds.
Get pre-approved for a mortgage with a lender: This will make you a serious buyer in the eyes of sellers and will determine “how much house” you can afford. And, shop around with several lenders to get the best deal – this can save you a lot of money, especially over the long run.
Develop a real estate investment plan: Just like a “road map” is needed to get you through unknown territory to your ultimate travel destination, a real estate investment plan is needed to help you realize your investment goals. Learning the fundamentals of how to develop a practical investment plan that’s tailored to your individual goals is essential for achieving investment success.
Realize that all real estate is “local”: Get a feel of the real estate market conditions in the areas where you’d like to buy investment property. This includes getting actual sales price (not just list price) data of recent investment property sales in the local areas. Having your finger on the pulse of the local rental property market is paramount for investing wisely.
We’ll stop and catch our breath here so that the information can be absorbed. Part 2 of this article completes this list with several more recommendations that will “round-out” the major steps needed to make smart rental property investments.