Investment & Rental Properties For Beginners

So you want to invest in property?

You’ve probably been warned not to put all your eggs in one basket before. A diverse stock portfolio is just part of that equation. If you’re looking for a more tangible asset, physical investments like real estate are the way to go. Investment properties can be a fantastic physical asset; they can create passive income in the form of rent, or they can be your actual home, and they can be adjusted depending on the economy (renting out a room, subdividing, rezoning for alternative uses, etc.)

Investment properties can be quite daunting...

It’s a lot of money to tie up and a lot of maintenance, not to mention having to deal with renters & rental agreements, repairs, renovations, insurance and more. It also incurs risk that is inherent to any investment, housing bubbles can burst and real estate market can collapse, like they did with the housing market collapse of 2008. Mooch is here to break down the basics for you!

Key Takeaways by Investopedia:

• Investing in rental property can be lucrative, but it can come with many challenges.
• Borrowers usually need to secure at least a 20% down payment for a rental property mortgage.
• Being a landlord requires a broad array of skills, from understanding basic tenant law to fixing a leaky faucet.
• Experts recommend having a financial cushion in case you don't rent out the property, or if the rental income doesn't cover the mortgage.

Key Terms to Know:

1. Value appreciation: property values increasing over time.
2. Real estate investment trust (REIT): a company that owns and operates income-generating properties, with investors able to purchase shares in the company.
3. Real estate syndication: like crowdfunding, but for real estate. A group of investors pool their resources to purchase large-scale income-generating properties and share in the profits.
4. Prehabbing: like flipping properties, but often sold to investors or builders who will do a more thorough rehab.
5. Net operating income (NOI): monthly rental revenue minus monthly expenses.

“Rates for investment properties tend to be higher than traditional mortgages. Make sure that the interest rate of your mortgage doesn't cancel out your monthly profits.”

Things to Consider:

• Location, location, location. How high (or low) are property taxes? What is in the neighborhood? What is the crime rate? How are the schools and are they nearby? Is there public transportation? What is the community like and is it growing? Does the community have improvements planned for the future?
• Interest rates. Rates for investment properties tend to be higher than traditional mortgages. Make sure that the interest rate of your mortgage doesn't cancel out your monthly profits (if you're planning to rent the property out). We love Bank Rate's mortgage calculator that tells you exactly how much you can afford.
• Margins. You want at least a 10% return on profits each year. When calculating this, keep in mind the cost of maintenance and homeowners/landlord insurance.
• Starting with a low-cost home. The lower the cost of the home, the lower the cost of unexpected and recurring expenses. Do keep in mind the saying: "never buy the nicest house on the block or the worst." But better to buy a lower cost one and minimize risk and expenses, as you can always upgrade later!
• Taxes. If your adjusted gross income (AGI) is more than $200,000 (single) or $250,000 (married filing jointly), you may be subject to a 3.8% surtax on net investment income, including rental income.
• Tenants. Not only do you have to find tenants to manage & pay rent, you'll need to be on-call for any issues they have with your property. Will you allow pets on your property? What, if any, utilities will you cover? Will you offer furnishings with your property? Are you handy enough to fix issues like plumbing or dry-wall? You will likely need repair people, and potentially even a property manager to help you deal with issues as they arise.

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