Investing in property goes beyond following a set of steps. It involves a process of self-examination before anything else. This article presents a guide to self-reflection when considering an investment in property; especially rental property.
Rental property can be an excellent investment opportunity for many people. As with any form of investing, the decision to invest in renting a property should include careful consideration. For this reason, there are several factors to consider before deciding when and how to invest in rentals.
Goals and Preferences
A potential investor must always examine his or her motivations for making an investment. If you are planning to invest in letting property, the gains may not be as attractive as those from other forms of real property investment. If your goal is to make money-spinning short-term profits, rental property may not be for you. Since rent income is normally fixed, rental property works best for individuals who prefer long-term, stable earnings.
Location, Location, Location
The next important thing to consider when investing in property is location. The amount of gross income you will generate from a letting property depends on where it is located. Some locations just offer better opportunities than others. The best way to objectively evaluate a location’s income potential is through research. Find out how much you can expect from renting out property in a specific place.
Expected Returns and Risks
Once you have chosen its location, you must then make an initial assessment of the rental property’s profitability. For this, you will need to determine your annual net income (yearly rent income minus total expenses such as taxes, mortgage, maintenance and replacement, depreciation, etc.). Next, calculate your return on investment (ROI) which is simply the percentage of your annual net income over your total investment. Compare your rental property ROI with a standard indicator like the interest rate on a time deposit CD to see if the rental property is really worth investing in. Of course, this is only a rough evaluation. There are also other, more refined and precise ways of assessing profitability.
Just as any kind of property investment, rental property has its risks too. One of these risks is vacancy, which means your rental property may become idle for spans of time. Another risk is uncollectible funds from renters. These risks of can be very harmful to an investor who pays a monthly mortgage on the rental property. These are just two of the common risks that rental property investors face.
Surprisingly, some people make decisions without much knowledge about how to invest in property. Avoid making this mistake, unless you are some kind of a real property genius. Experts can help you with such things as whether or not to invest, where and how to invest in property, and how to minimize risks. Do not hesitate to spend time and resources consulting qualified experts.
If you think you have covered all of the above areas, then it is now time to put them all together and make a decision. Will the return on your investment achieve your financial goals? What do the experts think about your deal? It is important that you find definite answers to questions such as these before you begin investing. Remember, these are essential first steps when considering an investment in property.