Real estate investing requires an understanding of the real estate market and the necessary capital. But for those with the ambition to make it happen, rental properties can prove profitable. If you are looking to purchase your first property or looking for ideas to maximize a current portfolio’s returns, check out the tips below. Read on as we take an in-depth look at the essentials you need to know about real estate investing for rental properties.
Interested in Real Estate Investing? Preparation is Key!
Before looking for your first big deal, investors must evaluate their financial situation. It is important to understand that financing an investment property is not the same as purchasing an owner-occupied home. Banks and lenders place higher qualifications and standards on these types of mortgages. While renting a property can generate consistent income, owners must also have the disposable funds to cover expenses, maintenance, emergencies, losses, taxes, and more. Generally, a good rule of thumb is to have a minimum of 6 months of income as an emergency fund set aside just in case. Continue reading some helpful financial considerations for real estate investing below:
Financial Tips for Buying Your First Property
- Pay Down Existing Debt – Paying down your existing debt helps get you qualified for a loan. Lowering personal debt also relieves some of the financial strain of investing by freeing up added capital.
- Create a Budget – Know what you can afford and stick to it. Once you start looking for deals, it is easy to get caught up in the process, but a budget keeps both feet on the ground. Remember to plan for the purchase price, maintenance, or any renovations, emergency funds, plus the cost of placing a renter in your property.
- Save for a Down Payment – Mortgage companies have stricter standards for an investment property. Anticipate at least 20% as a down payment. While that is high, there is no PMI that protects the bank in the event you default.
- Watch the Market – Diligently watch the local market to gauge what interest rates are doing. Keep in mind; these loans have higher interest rates than a traditional owner-occupied primary residence. This can potentially kill your profits, so ride it out and strike when the rates are at their best.
Besides a good hard look at your financial viability, there are a couple of other factors to weigh as you begin your investment journey.
Local Market
Location, location, location – the mantra of the real estate industry. It is true that location, when deciding where to invest, is incredibly important. Understanding the market climate will provide helpful insight to potential investors. Below are a few questions to ask yourself when evaluating a neighborhood.
Questions to Evaluate Neighborhoods for Real Estate Investing
- What is the average rental rate?
- Is the market hot or cold, and why?
- Which neighborhood is the most lucrative?
- What are the taxes in the area?
- Are there any local restrictions on rental housing as opposed to owner-occupied?
- How are the resale values of home in the area?
- What is the crime rate in the area?
- How do the local schools rank compared to nearby areas?
If you are unable to answer them, added research is needed. The more information you gather on a potential location, the better. After all, this information is vital to helping investors make well-informed and financially conscious decisions.
Demographics and Projections
Up and coming areas are the best opportunity to get bang for your buck. Look for locations with a projected upswing in development, industry, and average income levels. Get to know these areas and the types of tenants they have. Consider the local pool of potential renters when making your buying decisions. The goal for successful landlords is to provide tenants with what they are looking for, subsequently resulting in low vacancy rates.
Up and Coming Philadelphia Neighborhoods with Promising Investment Outlooks
Philadelphia is a diverse, cultural, and profitable rental market that is making a steady comeback. As housing prices have increased, so has the demand for rental units. That said, like any other city, not every neighborhood is drawing the masses of families, young professionals, students, and individuals that call the City of Brotherly Love home. So, let’s take a quick look at some of the more popular neighborhoods that offer investors a chance to get in on the action.
Philly Neighborhoods on the Rise
- Brewerytown – Labeled Philadelphia’s next big ‘hot spot’ just a few years ago, Brewerytown appeals to both families and professionals. Buyers and investors alike are catching on, and prices are on the rise. However, the savvy investor can still find a motivated seller with an undervalued home.
- Strawberry Mansion – Not too far from Brewerytown, Strawberry Mansion is finally nearing its long-awaited day in the spotlight. What was once associated with crime and poverty has slowly transformed into an attractive spot for families and new businesses. As more and more people discover Strawberry Mansion as the next cool place to live, demand for housing will rise along with prices. Investors ready to buy can get in before the price outweighs profits.
- Germantown – As one of Philadelphia’s most diverse neighborhoods, Germantown’s once tarnished reputation is changing. Thanks to a slow but steady upswing in average income levels and a growing number of middle-class residents, this neighborhood is undergoing a rejuvenation. Home prices in the area are on the rise but not nearly as fast as other parts of the city, offering great opportunities for real estate investing.
How to Find a Profitable Investment Property?
It is time to buy, now what? With finances in order and location narrowed down, the search is on. Unless you have extensive real estate knowledge, it is ill-advised to go about your search alone. As a matter of fact, the individuals you turn to can be the difference between long-term success and failure. So, begin with a reliable real estate agent who has experience tracking down investment deals. A realtor has not only access to a wider range of search tools than the general public, but they also possess the industry contacts that investors need. When picking a dedicated real estate agent, keep an eye out for the following criteria:
How to Choose a Real Estate Agent for Investment Properties
- No Pressure – At the end of the day, it is your money on the line. Steer clear of an agent who pressures or rushes you into a very serious financial decision.
- Know Your Limit – An investment property is no good if it stretches far above your means. Discuss your budget with the realtor and do not allow them to push your limit in pursuit of a deal. It is ok to halt negotiations above the budget and move onto the next opportunity.
- Permit Yourself to Walk Away – In the fast-paced world of investing, mere hours can be the difference between a deal or no deal. If your agent is not communicative or you feel they do not have your best interest in mind, walk away.
- Trust is Key – Choose an agent that has an established track record in the industry.
Key Traits of an Investor-Friendly Real Estate Agent
So, you have found an agent with the right level of experience, but that is not the only thing that matters. Buying real estate is a marathon, not a sprint, and investors need someone on their team from showing to signing. The truth is, even the most experienced agent might not match up with your goals. With that in mind, take a look at these other critical traits of an investor-friendly real estate agent.
- Speed and Efficiency
- Confidence
- Commitment
- Honest Awareness
- Unfazed by Rejection
How to Tell if a Property Will Be Profitable as an Investment?
Investing in real estate does come with its fair share of risk. Mitigate that risk by knowing what metrics to use when evaluating the potential of a future investment property. Join us below as we outline a few formulas every investor needs to know.
How to Calculate Investment Property Returns
Understanding cash-on-cash returns for your rental property is vital to success. This should be carefully considered since it measures a property’s profitability. Remember that this equation does not account for added expenses such as unexpected repairs, mortgage, or capital expenditures. That said, an acceptable outcome is around 8% to 12% so let’s take a look at how that is calculated below.
- Step 1: Gross Income – Operating Expenses = Annual Net Income
- Step 2: Annual Net Income / Purchase Price = Cash-on-cash Return (convert to percentage)
Need additional help? Check out the free Investment Property Calculator from AARP.
Evaluating Potential Rental Income with the 1% Rule
The goal of investing is to generate income; therefore, understanding profit margins can help sway your decision between potential listings. One tool to evaluate these margins is the 1% rule. This means that the gross yearly income equals 1% or more of the total purchase price. While not the only factor involved in decision making, this guideline helps ensure the property can generate sufficient income to cover expenses.
Anticipating Expenses with the 50% Rule
Expenses are the necessary evil in real estate investing. That is where the 50% rule comes in to help investors determine operating expenses versus a property’s gross income. Simply put, the idea here is that owners should plan for 50% of all gross income to go towards various expenses. These expenses include but are not limited to:
- Property Taxes
- Landlord and Property Insurance
- Repairs
- Maintenance Expenses
- Owner-Paid Utilities
- Vacancy Loss
- Management Fees
- HOA Dues
Tips for Choosing an Investment Property
The right property must balance profitability with value for the desired client base. After all, an investment property is only making money if it is rented. So, ensure the area and property you choose include desirable amenities. Focus on the following factors:
- The Neighborhood – Consider an area’s proximity to amenities and what the average local is looking for. Take the time to see the neighborhood for yourself. Remember, you are not just renting a unit; you are selling the area’s lifestyle as well.
- Amenities – Amenities are found both inside and out. While having the right features in your rental property is important, area amenities matter to quality renters. Things such as community pools, gyms, popular entertainment, and parks are appealing to potential tenants.
- Safety – Neighborhood crime reports provide a wealth of information. Everyone wants to feel safe in and around their home, so choose a property with a low risk of crime. In addition to reviewing crime trends in a particular area, do not overlook the types of crimes being reported. A safe location will also decrease the risk of vandalism or burglary while your property is vacant.
- Schools – Schools in prospective areas are important to families in particular. Locations that have access to private and public schools are ideal for family-focused rental properties. That said, properties near technical schools, colleges, and universities that attract young adults can also earn a consistent profit.
The Key to Success for Investing in Real Estate
Investing in real estate is a calculated risk, so start small. As the properties you purchase become more profitable, consider reinvesting that capital to diversify your real estate portfolio further. Investors in the know understand that being bogged down by managing maintenance and tenants takes up valuable time you could be looking for the next great deal. That is where professional property management comes in.
Hiring an experienced full-service property management firm early on is the best bet for a stress-free owner experience. To help you find the right fit for your portfolio goals, check out these tips below.
What to Look for in an Ideal Property Management Company
Rental property investing has many facets and your investment is important to you. The representative you choose to look after it will understand this. The right person for the job will answer any questions you have and take the time to alleviate any concerns. When screening potential property management firms, ask questions regarding the following areas:
- Industry Specialty– Rental management companies specialize in various types of management: residential, commercial, vacation, multi-family, etc. So, look for one that most closely fits your needs.
- Property to Employees Ratio – Managing properties takes time and effort; not every company has the support staff needed to give your account the attention it deserves. Determine how many units each manager is responsible for to help you decide if the property to employee ratio is reasonable.
- Experience – Look into how long a company has been in business. How integrated are they into the local community? Their experience and knowledge of local laws and the local market will be key to your success.
- Ownership – Inquire if the company also owns income properties as well as managing third party rentals. Having their own rentals in the local market gives them key insight into the market’s challenges and advantages.
Essential Services Property Management Companies Offer
- Thorough Tenant Screening
- Rent Collection
- Routine Inspections
- Maintenance Tasks
- Tenant Communication
- Eviction Proceedings
- Bookkeeping
- Compliance and Licensing
- Financial Statements and Reporting
Whether you have 1 property or 100, Bay Property Management Group Philadelphia offers owners comprehensive property management services. Are you an investor looking for a representative to maximize your ROI with the right tenants? Turn to the company proudly serving Maryland, Pennsylvania, and Washington DC with decades of combined experience in local markets. Check us out online today to see what the benefits of professional representation can offer you!