3 Things to Know Before Investing in a Rental Property
1. You make your money when you buy it
“The best principle to have in any real estate transaction is that you make your money when you buy it, not when you sell it — because if you pay too much for it, you’re never going to make money.”
Since many people who buy investment properties often don’t buy one in their same neighborhood, or even in their same city, it’s easy to be lured by what is perceived to be a good deal in an unfamiliar market. Yet just because a home is less expensive than those around it, or in an area on the “rebound,” doesn’t mean it’s worth investing in.
Often, investors see a home at a low price and think they’ve found a great deal, but you must do your research and your homework on the area to truly evaluate whether or not it’s a good investment.
Remember as Warren Buffett’s mentor Benjamin Graham once said, “Price is what you pay; value is what you get,” so always make sure you’re making an investment when you begin.
2. Know your worst-case exit scenario
Investors in any situation can be lured into thinking that only the good things will happen, and that’s what they plan for, but it’s vitally important to have an exit plan, too.
While investing in a rental property can certainly be a profitable and worthwhile investment — don’t allow it to be such a large part of your portfolio that losing returns from it could ultimately bring you down with it.
Forde wanted to highlight how critical it was to have an exit plan if “all of your assumptions don’t work out.” For example, if the home is unoccupied for a few months, the $800 monthly income instead turns into a $1,000 expense very quickly — and that could result in dire consequences if the investor isn’t prepared.
3. Be ready for the unexpected
With any investment decision — and almost any decision at all — things can quickly take unexpected turns. For example, if the HVAC unit and the water heater each go out on the same day, repairs could be north of $10,000 — wiping out an entire year’s worth of profit. In this, investors must see that houses can be great investments — but are often full of unseen costs that correspond with them. Being both prepared and able to address those issues when they present themselves is critical.
While rental properties can be great investments, like all investments, their returns also correspond to their risks — and now you have one expert’s opinion on what to keep in mind before you make that critical decision to invest in one.