JD’s Millennial Minute: How To Make Money Through Investing In Real Estate
Looking For a Starter Investment Property
An under-performing housing and job market in recent years has left many millennials looking for income beyond traditional means. Doing contract work, like driving for Uber, as well as freelancing to supplement income has become the new normal. But this strategy only reaches as far as the next paycheck. If you are among the most recent generation to enter the workforce and find yourself looking for a longer-term investment, buying property could be a great fit for you. A rental property can appreciate in value and become cash-positive in a relatively short amount of time, and once you have your tenants paying the mortgage, you can start seeing serious dividends. Investment in property isn’t like signing up for Uber, though. You’ll want to carefully consider every aspect of the property buying process, as there are numerous costs and hassles that may not show up for months after buying. Keep reading for a helpful guide for how to go about obtaining your first investment property.
How to Look
An investment property will not immediately become profitable, and in most cases it can take at least five years before you see any returns. So take your time in the shopping process – don’t rush into a property until you know everything about it. Like any investment, knowledge is power and the more you know the safer you’ll be. First define what you want out of the property. Do you want to rent to students or a family? Do you plan to manage the property or hire someone to help out? Are you looking for a multi-unit or single family property? Figuring out exactly the situation you’re looking for will thin your prospects and concentrate your search.
Where to Look
Once you know the type of property you’re looking for, try to narrow down your search to a few neighborhoods you already know or can learn quickly. Check listings regularly and you’ll become an expert of average sales prices for an area; with this knowledge you’ll be able to recognize right away when a property is listed under value.
Even if you know a neighborhood well, you should still consider it from the perspective of a renter. Check the things a good renter may be concerned about, like how safe the city is and if it has good schools or access to fresh food. Even proximity to freeways and shopping malls can be top of mind for prospective renters, so make sure to take everything into account.
Also, Look at local pricing trends to ensure you aren’t buying a property in an area with declining property values. These trends can change drastically – San Francisco recently saw home values drop for the first time in four years. You want to find a home that not only will appreciate in value, but where you can also raise the current rent in the foreseeable future. Business growth is an excellent indicator of a good investment. As businesses or certain industries start to expand and hire more workers in an area, those workers begin to look for housing nearby, increasing demand and nearby rent prices. Not to mention, successful business people in stable industries are an excellent demographic to rent to.
Overall, when deciding on an area to invest in, ask yourself, “Would this be appealing to renters?”
What to Look For
The where is decided by what renters want, but the what is up to you. For most property investors just starting out, the best bet is a single-family home or condominium. These are simpler to manage and unless this is your first property, you likely already have experience with one or the other.
If you know where and what you want to rent, the next thing to figure out is whom you want to rent to.
You may find that certain college neighborhoods boast lower home prices, but you’ll likely need to rent to students. If you are a recent college graduate and live in a college town, renting to students may be a good place to start. While they will likely be harder on your property, they will also have lower expectations of you as a landlord. The more reliable choice, though, is to look for long-term renters. Young families just getting started can be great tenants, and if they are happy where they live they are likely to stay for longer to maintain consistency for their family.
What to Know
When it comes down to dollars, don’t be afraid to be stingy. This isn’t a home for your personal use; it’s an investment and you should look at it as such. Look for undervalued properties or properties that only need a few fixes to fetch a better price. Don’t go over the top with home improvements—you don’t need granite countertops in a rental, and remember that even the best tenants can leave wear and tear on your property. Don’t forget to bring in a home inspector before you buy – a faulty foundation or bad wiring could cost you serious cash down the road.
No matter where you’re renting or who you’re renting to, remember that an investment property costs money and takes a lot of work. Even if you already own another home, be prepared for steep jump in your property taxes. Plan to set aside at least two percent of the property’s value each year for repairs; if you bought a $250,000 home, ensure you have $5,000 on hand for repairs in the first year. Also, hope for good tenants, but arrange for bad ones. And know that no amount of preparation will prevent you from making mistakes as a landlord. That being said, passive income is a great way to supplement your earnings, and doesn’t cramp your schedule the way freelancing might, leaving your more time to do the things you love. If you’ve done your research, you will hopefully find yourself in a cash-positive property that should pay long-term dividends in the future.
Are you a millennial? Make sure to check out these other installments of JD’s Millennial Minute:
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