on Feb 9th, 2008Guidelines for Investing in a Single Family Home
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Investing in a single family home is a great place to start your real estate investment career.
The main reason is that if the transaction is handled properly, you can get in with very little down, thereby being able to take advantage of leverage.
But don’t count on this type of investment being too profitable in the beginning. You can expect a fair rate of return, a tax shelter and a good chance for capital appreciation over the long term, but you might have to settle for a negative cash flow in the beginning.
So what are some of the guidelines for investing in a single-family house?
- Take you time and don’t rush in. If you see a house at what you think is an attractive price, you should still shop around the neighborhood and compare sales prices of similar houses. You should also look at the sales prices of similar houses in other neighborhoods that are similar to the one you are looking at. This is one approach to determine the value of a house used by real estate appraisers.
- Think about the house that you want to invest in the same way you might if you were going to purchase it for your own home. This is especially important if you plan to hold on to the property for the long term. Consider the location of the house and the trend in the neighborhood. Make sure the house is something a potential renter will find attractive.
- Find out what the rents are for similar houses in similar neighborhoods. This information will give you an idea of what you will probably be able to get for the one you have in mind. Also find out if it is customary for the tenants or the landlord to pay utilities.
- Determine the monthly payments. This might sound stupid but the real point is to find out if the mortgage is a so-called budget mortgage or not. In many cases, monthly payments are expressed as PITI (Principle, Interest, Taxes and Insurance). If its not a PITI payment then you have to figure out what the additional expenses of the taxes and insurance will be.
- If the down payment is relatively high, ask yourself whether you can pick it up by having the seller take back a second purchase-money mortgage. Using a second mortgage may be advisable if you think there will be rapid capital appreciation in the neighborhood.
- Are you prepared to manage the property yourself? Or will you want a property manager to handle the month-to-month details?
- Do not get personally involved with your tenants. Personal involvement makes it difficult both to collect rents and to raise them when necessary.
- Do as much maintenance as you possible yourself. If not, you’ll need to determine the cost of routine repairs and maintenance into your cash flow.
- Whatever you do, don’t forget about liability insurance. Make sure you get yourself a good landlord insurance policy - you need to make sure you protect yourself from lawsuits.
- Make sure you have enough cash flow to cover vacancies as well as marketing for tenants. An empty investment property doesn’t bring in any income, yet the mortgage payments will still need to be made.
