Rental homes, whether they be single-family detached properties, condos, two, three, or four-unit properties, share many of the same benefits.
Most people instinctively understand many of the working parts because they are the same as their primary home. They have a basic understanding of the value, how to maintain the property, and who the service providers are.
These properties allow an investor to obtain a sizeable loan-to-value mortgage at fixed interest rates for up to thirty years. They appreciate in value, currently exceeding many other assets, have defined tax advantages, and allow investors more control than many alternative investments.
Most lenders require a 20-25% down payment and will finance the balance at rates close to owner-occupied homes. Buyer closing costs will add another three to four percent to the amount of cash needed to close. It is also prudent to have available funds for repairs and maintenance.
There are successful real estate investors in every price range and part of town. Suppose your ultimate goal is to have the rent handle the holding costs and sell the appreciated property at the end of a seven to ten year holding period. In that case, it might be advantageous to stay in a predominantly owner-occupied neighborhood. They usually appreciate faster and will appeal to a buyer who wants it for their home. Chances are, this type of buyer will pay a higher price than an investor who may not be willing to pay as high a price.
By staying in an average price range, or possibly, slightly lower, you'll be able to appeal to the broadest group of not only buyers but also tenants while you are renting the property. Even during the mid-'80s, when the FHA interest rate was 18.5%, buyers were still purchasing homes. In contrast, the higher-priced homes have a tendency to slow down during trying economic times.
Ask your real estate professional what price ranges sell the best, rent the best and have mortgage money available.
Some investors manage their properties themselves, while others don't want to be involved. Professional property management has advantages like expertise, established contacts, operating statements, and economies of scale. Though there is a cost factor to consider, if they can rent it for a higher price and keep expenses lower than you can, it could minimize the difference.
A possible consideration might be to have a real estate professional place the tenant, check the credit, and write the lease. There would be a one-time fee for this, but the owner/investor could then manage the property, saving the expense of a monthly fee.
Understanding the landlord-tenant laws would be particularly important to an investor managing their own property, but regardless, the investor needs to have a basic familiarity with the law. There can be civil as well as criminal aspects. Examples might be that a landlord is required to change the locks on a property for a new tenant, the number of days before a landlord must return a deposit, and what to do if there are damages.
Another tool that can help investors is an investment analysis that will assist them in selecting a property that is likely to provide a satisfactory rate of return. Ask your real estate professional if they can provide this for you. They should be more familiar with rents and expenses to determine the cash flow and what kind of yield you may be able to expect over your intended holding period.