Investment Properties for Dummies: Let’s Start With The Basics
Does the thought of owning and managing an investment property seem daunting to you? It doesn’t have to be overly complicated—especially if you follow the right advice.
First, let’s break down the basics:
Real estate investors own properties individually or as part of an investment group. Any type of property lends itself to investor ownership, and real estate has always been considered a viable vehicle for increasing wealth over the long term.
Over the short term, investors receive income in the form of rent payments, which makes it such an attractive investment vehicle. Residential real estate is often the most preferred property type, since it has a lower risk and doesn’t require the cash infusions that commercial properties often do.
The Benefits of Real Estate Investments
Under normal conditions, real estate appreciates simply because there’s only so much land, and as it becomes scarcer, its value increases. How much its value grows depends on a host of variables, some of which are in your control, and some which are not. Owners who can wait out the ups and downs of the business cycle make money. Those who can’t, stand to lose it.
Real estate investments have the potential to generate a positive cash flow as long as you hold them as an asset, something that many other kinds of investments can’t do. It’s also one of the safest ways to leverage your investment dollars without the risks associated with buying on the margin in the stock market.
- Lenders may require six months of financial reserves for investment owners.
- Property owners are responsible for all expenses, including real estate taxes, property insurance, and routine and unexpected maintenance.
- You won’t receive any income when the property is vacant.
- Real estate isn’t a liquid asset. It takes time to sell a home, even in a strong housing market.
Cash and good credit are the keys to entry into the real estate market. Since the housing market crash in the mid-2000s, lenders have had to tighten their approval processes and require better documentation, and higher down payments and credit scores for investment properties.
The FHA loans that help people own homes at favorable interest rates and low down payments aren’t available for investment properties, although there are exceptions depending on the type of property. Conventional loans have higher interest rates, credit scores, and down payment requirements.
Once you’ve received loan approval for an investment property, you can start looking for residential opportunities. If you live in a city where home values shut you out of the market, you can put your investment dollars into another area, even out of state, where prices are within your reach.
Whether you stay local or go distant, turnkey property management companies specialize in investment properties. They know their markets and where the prime locations are for financially rewarding opportunities. These companies screen properties first, make improvements appropriate for the market, offer them as investments, and help make sure their clients get a nice return on their investment.
Then, they continue their services to the new owners, managing the day-to-day operations, including tenant placements, property maintenance, and rent disbursements. You specify the level of services you need.
Is It Right For You?
Building wealth with real estate has worked for many, but it’s essential that you enjoy it, too. If you enjoy something that’s tangible, requires some research, and reaps a reasonable return, it could be rewarding for you on many levels.