Investing in rental real estate is one of the keys to financial independence. But prices are falling visibly in all regions and the main players are worried. The methods of calculating prices have been questioned by real estate agents.
If real estate was a game of musical chairs, the music will soon stop. It’s always interesting to invest when you know what you’re doing. Here are 10 key tips for success.
What is your goal with this investment? An objective is only valid if it is written, communicated and if it frames all your decisions. If it is not the case, you have only wishes and I do not take much risk saying that they will remain wishes.
A goal is something you absolutely want to accomplish. The rental investment process is simple: look for a property, finance the investment, manage the property and start again.
Find a motivated seller
One of the basic rules is to buy well. To buy well, there are no secrets, you have to buy someone who really wants to sell. The first rule of rental investment is simple: you make your profit from the purchase, not the resale. If it’s not the case, it’s not worth it.
If you buy too much, perfect management will often not restore the profitability of your investment. One of the reasons I recommend you buy at the right price is that you absolutely cannot know the state of the market at the time you want to resell and so it would be a little surreal to bet on an increase the price of the property.
By focusing on immediate profitability, you guard against several things including the fact of having to sell your property if you cannot afford to maintain it.
Find a seller who does not earn money with his investment, who lives far from his property and who has to move, who is poorly informed in the market and you have a good chance to buy at a good price.
The purchase price is decisive and the rent that you can also draw. Do not pay too much for the property and do not overestimate the rental value.
Define your target
At a first investment and according to our borrowing capacity, the choice is often made between a studio and an 2BHK. Regardless of your choice, you must be consistent and use common sense. If you target students, small areas are traditionally reserved for them.
The consequence is that the location will have to be chosen according to the target. Everyone knows that location is one of the key factors for a successful investment but on the ground, reality often picks up on it.
Also, in the example of our student studio, the environment of the property is decisive. If you intend this studio to young workers, the criteria are different. Know who you are aiming for. Depending on the population, there are known advantages and disadvantages, for example the fact that the student stays for a short time and regularly needs the search for a substitute but benefits from the parental guarantee.
Do your research, visit a lot and make few suggestions
Wisdom dictates that you have to visit a lot of goods to make a purchase. The search method can be confusing because the media are very numerous:
- Real estate agents …
The number of properties to visit can be limited by the configuration of places but the basic principle is simple: the more you visit, the more likely you will find an interesting property. It can be to visit 40 or 50 apartments without any problem. It takes time but it is the price to pay to find the diamond in the mine.
The visit of the property should start only after having made your research and defined your objectives because it allows you in a few moments to make a decision.
Ideally you buy your property from someone who has not yet sold it. You want to avoid being in competition with all investors.
Buy next to you
Always always buy near home. The alternative is to buy in a place that we know well (for example the city where we come from). Proximity is necessary for 2 reasons:
- really know where you buy,
- to be able to intervene in case of problem.
If you manage the good yourself, it is all the more preferable to be close.
Create your team that understands how to invest in rental real estate
You must consider that the first investments are a learning process. A real estate agent, a notary and an accountant are 3 members of your team that you must select with care. Sometimes finding a good craftsman is also necessary.
Other members may be: architects, insurers, bankers and surveyors. If you really want to be serious in this area, you will have to create a team. If you are investing with a partner, look closely at yourself:
- are complementary,
- can debate healthy about an idea,
- work and harvest the rewards apart equitable,
- have the same goals,
- share the same values.
Unplug your Instinctive side
It is necessary to analyze the goods rationally. The best way is to establish a written list of criteria. The list of criteria guarantees that you do not fall in love with a property and that you compare the different properties correctly.
Analyze the good from every angle. The elements to look at are numerous but that does not mean that we must avoid controlling them. If you find a problem, this may not be a reason to cancel the purchase but to negotiate the price accordingly. In this case, nothing is worth a quote from a serious professional to perform the repair.
In general, a tenant will be less demanding than a buyer. This is a point to remember.
Do your profitability calculations
Calculate the profitability of your investment. Below 6% net (after taxes), the investment is debatable. You must not have surprises.
The price charged by the seller has no basis. It is often based on its expectations or on an estimate itself based on questionable data.
It’s up to you to calculate the price you can give based on the return you want. For this you must obtain the rent price and be certain that it is the real rent. Trust but check.
Often, the goods will be overvalued but that does not mean that you have to conclude that you are wrong. You buy a financial income not stone. If the income is not good, your investment is missed.
However, two other elements can play in your favor: the potential rent and the future rent.
- The potential rent is the rent the current owner could obtain by making a few simple changes. These are the same changes that you will be able to do immediately to raise the rent.
- The other point, the future rent corresponds to the supposed progression of the rent based on the property, its environment and the ceiling of increase framed by the law.
Maintenance costs should not be underestimated. The older the building, the more expensive the maintenance is a general rule that you can follow.
Financing your Investment
Searching for financing can be lengthy but to avoid losing an opportunity, it is good to check your borrowing capacity before making an offer just as you would have done to buy your own home.
Before you decide to take a leap onto the property ladder you’ll need to make sure your credit score is in good shape. There’s no point saving a great deposit only to find out that you can’t get a mortgage because your credit score is too low. It can seem quite daunting initially but there are some super easy ways to improve your credit score before you buy a house. Read more
Do not hesitate to do the right thing, stay informed
What grabs the beginner during a first investment, he usually loses later to his regret as a self-fulfilling prophecy: you cannot win with real estate.
The professional investor does not hesitate to do the right thing whether it is marketing to rent the property, insurance to protect himself or lawyer to study a thorny problem before the purchase. There are areas where you should not make small savings and the entire study before buying a property is critical.
Find good manager
Management is a critical point. If you bought well, the management can ruin your purchase and your cash flow. Even if you do not plan to entrust the property to a manager, plan a margin in your calculations for this eventuality.