There’s a lot to consider when trying to determine whether a piece of real estate will be a sound investment. Of course no one can say for sure whether you will make or lose money on any investment – there is always an element of risk involved. Still, by taking a good look at the numbers involved you can get a good idea of whether you want to move forward or keep looking.
First look at what you will have to put into the property. This will likely include a down payment, mortgage fees if you are financing the property, closing costs, and any renovation or furnishing expenses. You will likely look to recoup these costs over several years, or over the long term as your equity in the property grows.
Next examine your monthly income potential versus expenses. What can you expect to rent the property for? How much of the time can you expect the home to be rented. Local real estate professionals and property management companies could be a good source of this information – but be wary of anyone too closely related to the transaction such as your buyer’s agent. As good as their intentions may be you want objective information, not excitement about the possibilities.
What will your monthly expenses be? Consider your mortgage payment, real estate taxes, insurance (be sure to let your insurance representative know that you will be renting the property so you ensure you have the correct coverage), any HOA fees, the property management fee, and a cushion for any upkeep or repairs.
Now ask yourself some tough questions. Can you afford to lay out the upfront expenses knowing it might be some time before that money will be available as a liquid asset again? Check with a tax professional to see what the tax implications of the investment property are likely to be. Will you be able to write off any losses? What will you have to pay on any profits? Do you have a plan in the event that the home is unrented for an extended period of time?
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Everything above has been fairly cautious – but now some good news. Remember that if you choose a fixed rate home loans your payment will remain constant for the life of the loan (insurance, utilities, taxes, and upkeep will change over time), while you will hopefully be able to increase the rent you charge every few years. The value of the home will also conceivably continue to increase adding to your net worth over time.