For a first time investor interested in investing in property, what are the options? Would they be better off buying their own home and holding it for capital growth, or a buy-to-let property they rent out to pay the mortgage while hoping for positive cash flow and capital growth?
I'm struggling to understand why someone who has never owned a home before is considering purchasing such property as an investment to lease out.
The only tip I have in such a situation is for the person to buy a home and live in it for a few years. Then they'll at least have a starting point in understanding the true costs involved. Otherwise they are going to end up spending an awful lot of money for negative gain.
Home "investing" really isn't for people that haven't been through this experience.
There are three ways to make money on property.
The first is buying it at a discounted rate (below market), making whatever repairs are necessary to make it attractive, then, hopefully, selling it at market rate. If all of the expenses are less than the price it sells for then you win. This needs to be done in a short amount of time - less than 90 days. Otherwise your risks in the housing market increase. This absolutely requires that you be savvy enough to know how much things cost. Most of the people I've seen doing this handle the repairs themselves, which means a lot of manual labor.
The other way is to buy a home then lease it out. The lease amount needs to take into account that there will be months that it is just sitting (between tenants) as well as that things break and need repair. Again, if you haven't owned a home before, especially in the area you are considering, then it is very easy for you to lose big time here.
The third is property speculation. This basically happens where you buy a piece of land hoping that some event occurs which causes the price to go up. There are many possible situations here, most of which involve being able to predict the future. Mileage may vary.
Investing in property is a great way to build your asset portfolio. It is also a great way to crush your financial dreams for all time.
Property investment SHOULDN'T be done on a whim. You need to have a solid understanding of the type of property you're investing in, what you plan on doing with it and what you're going to get out of it. "Start with the end in mind" many savy real estate investors would say.
I currently own and operate two four family homes. I have also owned a few others that I have sold and profited from. So my specialty is buy and holding rental properties. I can't speak to buying a single family home because I haven't worked with that yet. All I can tell you is if you plan on getting multifamily properties, dip your toe in to make sure it's for you. Get something small like a duplex and see if it's something you can handle. Not everyone has the intestinal fortitude to handle tenants. You have to run your properties like Stalin. If you give tenants an inch they will bankrupt you.
All of that said, it's not rocket science either. Anyone that can do basic math can usually find a deal. Use tools at your disposal. Don't guess. If you're looking for a rental property, look at the comparable properties on the street and in the city. See how much they are renting for. Look at the asking price and use the Gross Rent Multiplier to determine if you're getting a deal or not. No book is ever going to give you a difinitive answer if you're getting a deal or not. You need to do the work and research yourself. Don't be scared off by it. Just put in the leg work, make sure you know your numbers and make sure you consult professionals, not your best friend or family. Talk to a REAL accountant. Hire a REAL real estate agent that you can trust. GET AN INSPECTION....
Finally, run your finances like a fortune 500 company. If you don't know how to produce an income statement, create a budget, track spending ect you are in trouble. Just because you buy a house doesn't mean you're going to instantly know how to do these things. Start now and be ready. Don't be an amature, and don't cook the books.
These are the fundamentals of successful real estate investing.
- Rich Dad Poor Dad
- (Most) Donald Trump books
- The Richest Man In Babylon
Those books will get you started. Also read about rental tax law. This is probably the single most important thing when you are dealing with rental income. When Uncle Sam comes for his cut at the end of the year, you want to know how much of that rental income you're going to need to pony up. It could be a ton if you don't use the deductions you can.