Residential Real Estate Investing 101: Considerations for Prospective Investors

Real Estate Investor

It has always been a dream of mine to become a landlord. I know that that sounds a little funny to some people, but real estate can be a good supplemental investment to a well diversified portfolio.

Not only will real estate provide you with an additional income stream from the rent you collect, but it can also eventually appreciate in value if you hold it long enough. However, real estate investing is not for everyone. It is a venture that should be carefully considered. Here are some of the things that a prospective investor should contemplate before taking the plunge:

A 20 Percent Down Payment Is Required

Thanks to the recent real estate bubble and mortgage meltdown that touched almost every corner of America, banks are still hesitant to lend money. They are especially cautious when lending money to investors looking to be landlords.

Banks are now refusing to finance more than 80 percent of the value of a property even to borrowers with excellent credit. Investors must have at least a 20 percent down payment to even be considered for an investment real estate loan.

It is even worse if you want to buy a townhome. The townhome market is so poor now that banks are requiring investors to put up 25 percent for those properties.

Consider The Opportunity Cost Of Your Investment

In the end, investors are in the business of making money. You must consider the same things when choosing rental real estate to buy, like are you earning a good return on your investment?

For example, if you buy a $100,000 property with a $20,000 down payment, you should expect to earn a $2,000 profit from the rent you charge over the course of a year.

Why $2,000? If you had invested your $20,000 down payment in the stock market, you should expect a 10 percent return on your money or $2,000 per year. That is your opportunity cost of doing business.

While the past couple of years have been poor examples, the stock market has returned almost 12 percent annually over the past 100 years. So why would you invest in real estate that earned you less than another option? You should pick the investment option that earns you the largest return and sometimes that may not be rental residential real estate.

Research The Neighborhood Very Carefully

A great neighborhood can make or break your investment. Are you going to be able to charge enough rent to cover all of your costs? Is the rental property you are looking at in close proximity to schools, retail establishments, community centers, parks or even Wal-Mart?

Of course, you will pay more for a home in a desirable neighborhood, but you will also be able to rent it faster and for enough money to cover all of your costs.

Find A Good Real Estate Agent

Like all real estate purchases, finding a good realtor is essential. A good real estate agent can help you determine if you will earn a profit or at least break even, or should clue you in to a potential loss before you buy the property. Your real estate agent is also you best source for referrals for property managers, lawyers, accountants and other professionals.

Do Not Forget About the Hidden Fees Of Being A Landlord

There are a lot of hidden fees that landlords pay that many do not factor into the equation when looking for a rental home to buy.

As the owner of the home, landlords are responsible for the maintenance of the property, advertising for new tenants, screening new tenants and collecting rent. Many landlords outsource these tasks, but property management fees can easily cost 10 percent of the rent you charge. Condominium owners also face homeowner’s association charges and lawn maintenance requirements that continue to eat away the cost of a landlord’s profit.

Real estate investing and becoming a landlord is not for the faint of heart. Without a doubt, it can be a profitable venture if done correctly, but there are many factors that must be considered when you invest in real estate.