Your Second Property
You’ve successfully managed your first investment property. Of course, there was a steep learning curve, and you didn’t realize quite how much work was going to be involved, but you made it. Now you’re probably enough of an expert that you can give advice to friends and family. The question is what’s next for you?
For most investors, the answer is easy: a second property.
This time, though, things are a little bit different. Now that you have a handle on the process, you can start paying more attention to the property itself. Where should the property be located? What type of property fits in well with your investing style? And – obviously – which property is going to net you the biggest return?
There are no one-size-fits-all answer to these questions. (If there were, you would certainly see a lot more real estate millionaires floating around.) Rather there are a number of important factors that an investor must consider before purchasing another property. Let’s take a look at some of the most important ones.
You already know that location is important, but which elements of location should be on your radar? The first is the economic and population status of the area. Is it a locale which is experiencing population growth? Are there jobs to support the growth? Is it a well established area with a good demographic mix? Conversely, is it an area that is seeing a declining population? Or is it a popular area right now but, as a result, is experiencing a bubble in real estate prices?
Another important location factor is neighborhood. Here it pays to partner up with a local real estate agent. An experienced agent will know the ins and outs of the area, and be able to clue you in to things that you would never know otherwise. There are some neighborhoods where moving just a block or two away could result in very different property values. The neighborhood can also have a major impact on resale potential. A block with luxury homes might see much less movement than a block with more standard family homes.
2. Opportunity Costs
Your first piece of real estate was educational and you expected that it would take up a lot of your time. Now, though, you prefer to get back to “normal”. With your second property you can start thinking strategically. Do you want to get involved with a rental that will require constant maintenance and landlord duty? If yes, is it economically feasible to hire a management company? Or maybe you would prefer not to have the daily burden of a rental altogether, and instead opt for a more passive real estate investment in the form of a REIT. Whatever the answer may be, defining your expectations will help determine which properties are relevant for consideration.
3. Property Condition
Rehab properties usually carry a cheaper price tag, and the popular media loves touting the potential profit of a fixer-upper. However, the reality is not always so simple. You can certainly make money on a rehab, but you need to know exactly what it will cost you to get the property up to par. Rehabbing is one of those areas where experience can have a direct effect on both the time and expense involved. In the beginning, you should find a trusted expert and use their insight to help determine the real costs of the investment.
It pays to read industry literature to keep up with real estate trends. Are new home buyers trending to smaller homes or more luxury sized? Are micro homes a fad or a real trend? Does it pay to buy a property to rent out via AIRBNB? In the long run which is more profitable: short term rentals or long term rentals? Getting educated on trends can certainly provide valuable information when choosing a property.
No two properties will have the same cash outlay, and it is imperative to identify the amount that your property will entail. Here are some of the elements that you should price out:
- Operating costs (for commercial properties)
- Mortgage payment
- Property tax
Keep in mind that although you may have to pay these items up front, some of them may be eligible for a tax deduction. Part of every investment plan should be a review with your accountant or financial advisor.
The property sounds like a good deal, but how do you know? Industry standard is that the property price should be roughly 100x the amount of monthly rental income. This enables the property to be paid off in a timely fashion, while also allowing for mortgage payments, maintenance, and taxes. Obviously this guideline is not relevant for every piece of real estate. Taking the time now to calculate future earnings and costs can really help in insuring that your investment stays profitable.