Real estate investing is a great long term investment strategy to store some of your money while also accruing profit overtime.  No matter the size or type of property, making a smart and carefully chosen investment can significantly increase your income.  

Let’s play out this scenario:

Craig see’s a four bedroom house for sale for $240,000 and plans to put down 20,000 for a down payment. Today’s mortgage rate averages at about 4.5% per year, so that would cause his 30- year mortgage payment to be $1,114.71 monthly.  Using a worst case scenario in Los Angeles, the average rent for a four bedroom house is $2,163 monthly, which brings Craig’s gross income to $1,048.29.  Subtract from that the costs of property insurance at $208 a month ($2,500 yearly) and property management fees of about $250 a month, plus taxes, you’re looking at about $394.04 in monthly net income. That’s an additional income of $4,729 every year!

Keep in mind that real estate investing is not for the faint of heart.  There are always risks and you should be careful when deciding to buy an investment property.  The above scenario is basic in terms of the profitability to an investor.  Make sure you do extensive research and planning before making every purchase. 

Here are a few tips on what to know before investing:

1.      Decide what kind of property you want to purchase:  There are many types of properties to invest in.  Each requires different kinds of knowledge.  Some property types are doing better in the market than others at the time of your investment, but inevitably you should invest in a type you feel most comfortable in handling.  For example, with a retail property, you need to have a good sense of what type of business the property is best suited for.  Should it be a store front or a restaurant?  What are the demographics of the consumers in the surrounding area?  Is there too much competition nearby? Etc.  Types of properties to choose from include: 

a.       Residential (homes)

b.      Multifamily

c.       Office

d.      Retail

e.       Industrial

f.       Mixed-use

The rule of thumb after you choose what kind of property, if you are in a tight spot financially, you want is to make sure that the property is well maintained. One of the worst things to do is to buy a property that needs to be fixed up extensively. You will be losing a great deal of income with the property, being that it’s unable to be leased out. On top of this, your expenses will be extremely high at the beginning, which might make your ROI suffer in the long run.

2.      Research the neighborhood: This is one of the more important steps.  Research the vacancy rates the going rental rate in the surrounding areas.  This information will tell you how much you can charge for rent and is predictive of your gross income.  It’s also to keep the neighborhood in mind for some of the costs associated with your property such as the mortgage, insurance, and the yearly taxes in that area.  For example, areas with higher crime will drive up the costs of your property.  

3.      Be comprehensive in all of your other property expenses: As you have already read above, there are quite a few costs that come with being an owner of an investment property.  In most cases for single-family homes, the owner also pays for the gardener and pool service if applicable, property management, and routine maintenance.  Major repairs, such as a leaky roof, flooring, replacing the water heater, or plumbing are not as frequent as other costs, but are still the owner’s responsibility.  Don’t forget to add these to your hypothetical budget.  The only exception to these financial obligations is if the tenant was responsible for damages.  Depending on your investment property, you will need to take into account the following expenses:

a.       Water/sewer

b.      Garbage

c.       Utilities

d.      Legal fees

e.       Accounting

f.       Evictions

g.      Office supplies

h.      Fuel

i.        Capital improvements

j.        Property Management

k.      Leasing/Marketing

Important Tip: Make sure that you can cover the expenses on your own without income. You will have times when your property is vacant and should be prepared for this since it is a normal occurrence.