Real estate investing is not simple and you should understand the financial and legal aspects very well before your first transaction.
These are some basic tips to invest in real estate.
1. Gather data before making an Investment decision
The information that you will receive about the property will probably come from the current owner or from its broker. You should verify it and understand it well.
Ask to see present and previous leases: How long has each lease run for this property? Do tenants have options to renew it, if so, what are the conditions of the renewal. Do the leases rates agree with the seller’s information? Check with an Real Estate investment attorney about the wording but include in the offer to purchase the property a statement in which the Seller warranties that the leases are for X amount of money with X expiration date and the renewal options will agreed upon.
A statement including the fact that these warranties will be maintained after the purchase.
Property Tax Bill – Confirm that the tax bill is correct with the tax collection office. Check for any future assessments that could increase the taxes of the property.
Utility bills: Check electric, gas and water bills with the seller and if possible get a copy from the providing source.
Get the quote for the Insurance of the property, although you should also get a quote from your own agent.
Get a copy of the seller’s tax return related to the investment property. Ask to see only the part related to the subject property. If the owner holds the property as an individual, the information will probably appear on Schedule E. If it is under a limited liability company (LLC) or some other form of partnership, then the property has its own tax return.
2. Become a financial Detective
The basic principle of income property is to collect money mostly from rent and spend money on operating expenses and loans against the property. Hopefully, you will have a positive cash return from the property and perhaps someday, you can sell the property with a large profit. These are the basic returns of real estate investment: cash flow, appreciation, amortization, and tax shelter.
Gather information on what is the regular vacancy rate for the property and compare it with other similar properties. Compare the Net Operating Income (NOI), that is, the gross operating income less operating expenses. In other words, what is left of your total potential income after all vacancy and expense items have been subtracted. Mortgage payments and capital expenditures have not been subtracted on the NOI. After comparing the properties, take a careful look at big differences in expenses and earnings.
3. Keep your emotions out of the deal.
The investment property should be looked like an income-producing source. Do not confuse it with the place where you would like to live in. The decision should be made based on returns, not in looks. Stick to the analysis and if it does not produce what you are expecting, let it go and wait for the right property.
4. Understand the Tax Benefits
There are significant tax benefits to real estate investors. Probably the most significant is the depreciation write-off. Ask your tax advisor about this type of write off and other deductions such as mortgage interest insurance and maintenance expenses
5. Use the “1% Rule”
For a preliminary analysis, you can use the 1% Rule that states, that an income producing property must generate a return at least 1% of the price you pay for it every month. For example, buying a property for $300,000, the monthly rent should be $3,000. Do not rely only on this rule since there are many other factors such as the future value of land, appreciation, and others that have to be taken into consideration.
Real estate investing can give you great returns. However, it is important to make sure that your investment is done with the best possible practices. Doing so will prevent any financial disaster. Be sure to know as much as you can, get professional advice from real estate lawyers, accountants, and real estate professionals.
About the author: Beatriz Rocha is a real estate professional affiliated with Coldwell Banker www.bearocha.com