Investment property is a relatively safe asset class for investors. Unlike currency, stocks, shares, bonds and other investments, property usually gains in value over time and unless you make a poor buying decision, you shouldn’t lose money on the initial investment. Nevertheless, property is not a “cheap” investment. You can’t spend a hundred bucks on a property. Most properties cost tens of thousands of dollars, so they are not an impulse buy. There is also the question of how to fund your purchase. Whereas you might use a credit card to buy gold coins, you will probably need to tap into existing home equity or arrange a new mortgage to finance a property purchase. So, is property really a smart investment or would you be better off putting your money into government backed bonds instead?
Property investment is a long-term game. It’s not easy to make short-term gains in the property market, although some investors do manage to make a quick buck by snapping up undervalued properties, renovating them, and then flipping them for a quick profit. For an inexperienced property investor, it is much better to spend time and effort looking for the right property, preferably one that you can rent out to maximize your income. To help you get started, here are some tips.
Identify the Right Market
Some markets are better than others. The ideal market is a town or city where you can expect to make a decent long-term return on investment without taking a high risk. The best way to identify such an area is to do some research. The internet is a mine of useful information and some well-known websites have published useful guides to the top places to invest in housing. However, if you prefer to invest locally, there is no substitute for talking to your local realtor.
The property market is a real estate agent’s bread and butter. If they don’t know the local market, nobody does. Talk to a few realtors and let them know you are interested in property investment. They are sure to have some helpful advice for you.
Funding Property Investment
If you have a pot of cash burning a hole in your pocket, congratulations, you are in an enviable position. But, if like many property investors you don’t have tons of cash, it’s time to look at your property finance options.
Refinancing an existing home is one way to fund the purchase of a second investment property. Investors refer to this process as “gearing”. How it works is simple. You refinance property one to release enough equity to cover the deposit on property two. Then, once there is some equity in the property, repeat the process to fund the purchase of property three, and so on. It’s all very simple, and given that interest rates are very low right now, a cheap way of funding property acquisition. However, keep a close eye on mortgage rates NJ before you make any firm decisions, as interest rates are unlikely to stay low forever.
Money tied up in property is not easy to access. You can’t sell a property to release cash and pay off your mortgage, so make sure you can afford the repayments if interest rates rise. If you intend on letting your property out, rental income needs to cover a minimum of 125% of the mortgage costs, but it is better if you buy in an area where rental demand is high and you can afford to charge more. The extra income will cover your costs and any tax payable. Meanwhile, your capital investment continues to grow.
Managing a Property Portfolio
Since property can’t be left to rot or you will lose money on the initial investment, you have to factor in management costs. Most property investors enter the buy to let market so that their investment property earns a regular income. If you have taken out a mortgage on the property, you will need an income to cover the costs, but even if you paid cash, the property will require regular maintenance and upkeep.
You have a choice: manage the property yourself or pay an agent to do the job on your behalf. For example, you can hire a company like Property Solutions Hua Hin to manage your property.
If you’re buying a property in a different city or state, hire an agent. Otherwise, take on the management yourself to minimize costs.
Property investment is an exciting way to earn extra cash and create a nest egg to fund retirement. However, there are a few pitfalls, so always take professional advice before you dip a toe in the property investment market.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
While living overseas, he uses PureVPN for a low cost VPN service.
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While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.