Whether you’ve invested in real estate to make a living or you’re renting out your property as simply a side gig, managing a rental property can be extremely advantageous – especially when it comes to your finances. While there is a lot of profit potential associated with investing in rental property, there are several steps you should take before deciding that it’s the right money move for you.
After all, countless factors can throw a wrench in your plans and change the course of your profits, like the current state of the real estate market, your debt situation, and unexpected expenses. Think property management is in your near future? Here are some financial considerations to keep top of mind before putting in an offer on any rentals.
1. Check your current finances
The first step in the buying process is to analyze your financial situation to determine if buying and renting out a property is both possible and worthwhile. Your debt-to-income ratio, the amount in savings, and credit score are all numerical indications of your readiness to take on a mortgage. Lenders will look at these factors when considering your loan approval.
Investment properties require much stricter requirements than standard mortgages. You’ll need a credit score of 620 paired with a 20% down payment if you’re looking to take the loan route rather than using cash. Keep in mind, a higher credit score usually calls for a smaller down payment. You’ll also need documentation in the application process for your investment property, such as tax returns, W-2s, and bank statements. Stay in touch with your finances and speak with a professional to get more details regarding financial qualifications.
2. Learn about rental expenses and pricing
Once you get a grip on your financial situation by speaking with an expert, you’ll need to learn how much your property will cost you each month – otherwise known as operating expenses. These include but aren’t limited to HOA fees, exterior upkeep, maintenance or repairs, and property taxes. Operating expenses can range anywhere from 35-80% of the rental income.
With that being said, you’ll need to price your rental accurately so that you can both make a profit and manage the property at the same time. After you lay out all your monthly operating costs, determine the value of your property and research comparable units, you’ll be able to accurately price your rental. The right amount will allow for profits for you and a desirable place to live for potential tenants.
3. Determine how you’ll pay
Getting a clear picture of your financial health is so critical because it’s the main determinant in how you will support the investment financially. In other words, will you pay for your property in cash? Or will you be exploring loan options? If you don’t have a hundred thousand dollars in cash on hand plus the extra needed to cover inevitable property taxes, maintenance, and insurance costs, you should explore financing options like home equity loans.
If you already own a home, you can access a home equity loan based on the equity you’ve built in your primary residence. It also helps you get a lower interest rate than you would with a personal loan based on your payment history. Plus, you can use the money, however, and whenever you want. Is a home equity loan right for you? Or can you front the cash to get started? Talk with a financial advisor to guide you in making the smartest decision for your future.
4. Learn about the current market
Especially these days, it’s important to understand the current state of the real estate market before buying property. In the wake of a worldwide pandemic, interest rates on mortgages are at all-time lows, making it an ideal time for many to buy property, apply for a second mortgage, or even refinance an existing home loan. However, interest rates for investment properties are typically 0.5-0.75% higher than standard mortgages. If an interest rate is too high, more of the money you make on rent will go toward interest, taking away from your long-term profits.
To make the most informed decision regarding your future, it’s important to keep up to date on the market, conduct diligent research, and most importantly, ask questions. Utilize every resource you have, especially when it comes to your finances. You’ll avoid making major monetary mistakes and watch your investment thrive years down the road.
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About Are Morch
Hi, I am Are Morch. Your Hotel Marketing Coach and Customer Experience Expert that specializes in creating effective digital customer experience offer for hotels while growing and scale customer acquisition and revenue.