Before you decide to buy that second home as an investment property, there are a few things that you need to consider to reduce your risk of sinking. Data is your best friend, not assumptions. Run your numbers, study trends and do due diligence. It is not a smooth sail but if done well it can be lucrative.
- Location – In real estate business, location matters. You can have a beautiful house in a crime-ridden location that may end up sitting vacant or rent for less. A good location is one that has a good school district, low crime rate, reasonable property taxes, high employment rates and low vacancy rates among other things.
- Purchase Price – Properties may list for prices that are way above the their true value. It is important to work with local realtors because they have a better understanding of the housing market in a particular area. Secondly always have an estimate of the closing costs for your area of interest. Remember closing costs vary from location to location.
- Rent – Without knowing the projected rent, it becomes harder to calculate the profitability of a venture. It is important to know the expected rent so that you can do the projections. Start by working with local real estate agents to determine your probable rent. Use tools like zillow.com and hotpads.com to compare the ranges of similar properties in your neighborhood of interest.
- Mortgage – Knowing how much you are going to be paying in fixed monthly payments helps you again in calculating the profitability of the property. As a rule of thumb try to have a gross rental income that is above 0.8% of fair market value of the property. If data is available, then doing an Capitalization Rate and a Cash on Cash Return analysis could provide a better insight.
- Property Management Costs – Who is going to be managing the property? Are you ready and willing to get that midnight call about a burst bathroom pipe? Will you be living close to the property? If the answer to any of the last 3 questions is NO, then consider hiring a property management company. They know how to screen tenants and how to handle tenant requests. It is important to call around for different quotes and read reviews. Go for a reputable company.