This is a conversation I frequently have with my past clients. Real estate investments have produced many of the world’s wealthiest people. Many clients I speak with don’t immediately consider leveraging their primary residence. Providing you have ample equity, a refinance to pull some cash for the purchase of rental property could be a great solution. Investment properties generally require a larger down payment than owner-occupied properties and have more stringent approval requirements. Another reason for the largest down payment is mortgage insurance is not available for investment.
There are many things to consider when you decide to be landlord. Obtaining landlord Insurance, knowing basic Landlord/Tenant laws in your state, etc. Is it important for you to have your rental property near where you live? Will you manage it yourself or hire a property manager? Not everyone is cut out to be a hands-on landlord. If you do decide to do it yourself, it makes sense to have a solid team of house cleaners, handymen and contractors in the event of an issue. Hiring a property manager will eat into your profits. Making sure this expense is in your budget from the onset can keep you from financial “surprises” after the purchase has been made. Experts advise you have a 20 percent cushion for unexpected repairs as well.
Here in California, prices are higher than in other parts of the country. You may want to consider making a purchase in another state, thereby freeing up some funds to hire a property manager. Choosing a property in another state requires research and investment savvy. You will want to be in a location where the population is growing, near a college, or where the area is stable or picking up steam and in demand. If outside of your own state, your local lender and agent may or may not be able to assist. Most agents and lenders have a network of people across the country with whom they would feel comfortable referring to you.
How much will my payment be? What items need to be done to the home in order to charge for rent what is comparable in the immediate area? Will I need to hire a gardener? Researching and understanding the area and its rental market is vital to your investment strategy. Working with your lender and real estate agent as well as a property manager (if you choose to use one) will help you assess the answers to these questions and help you determine your budget.
Speaking with your tax advisor and financial planning advisor prior to making the purchase is always my recommendation. They can help you calculate your operating expenses and margins, determine your return on investment (ROI), and help you establish what makes the most sense for you and your financial goals.
