New investors are often eager to begin building wealth with rental real estate in San Jose. However, if you’ve never done this before, there are a few things you need to know before you get started. We’re talking about those things today.
Financial Stability is Necessary
You have heard the phrase that it takes money to make money, and in this case it’s true. You need to have money if you want to invest in real estate. Without it, we recommend you stop what you’re doing and come back once you’ve saved some funds. You cannot invest in property without money. If you spend your entire life savings on this investment, you could end up disappointed and financially strapped. Your down payment will need to be between 20 and 30 percent of your home price, and then you’ll need to work with a broker so you can get financed for the balance. These things require financial stability.
Get to Know Your Rental Market
Don’t invest in a market you don’t understand. When you’re ready to purchase a property, get an idea of how much you’ll earn in rent. This can be a difficult number to estimate, but you can start by looking at other rental properties and how they compare to yours. You’ll need to establish a rental range that makes sense, and you’ll need to understand how that amount will affect your cash flow. Expenses will be just as important as income, so get organized. When you understand the market, you’ll do a better job of attracting great tenants and marketing your home.
Evaluate Your Return on Investment
Estimating your ROI, or return on investment, is an important part of the process. Many people believe that investing in California properties is a bad idea because there’s often a negative cash flow. However, that’s a misconception. Owning a property in Silicon Valley for less than $1,000 a month is a pretty good deal, right? When you’re renting out your home, you have a tenant who is paying the majority of your expenses. While you may not have all of the expenses covered, you’ll still have the asset and you’ll only be paying a little bit of money every month.
Your rental property will also appreciate and grow in value, even while your tenant is paying down your mortgage. Living with the minor negative cash flow is worth it because you’re still earning a high ROI and retaining a major asset.
You’ll also benefit from tax advantages when you own an investment property. Deductions will include the interest on your mortgage, insurance, and any capital improvements or repair costs. You can deduct your property management fees and other professional fees. This will reduce your overall tax liability, saving you money every year. Get some advice from your tax professional.
Buy in a Location You Know
First-time investors should purchase their first rental property in an area they know well. If it’s close to where you are, you’ll already know the tenant pool, the commute times, and the school district. As you become a more experienced investor, it will make sense to buy in diverse neighborhoods and perhaps even out of the area. Your early investment opportunities, however, are better made in areas you understand.
Put Aside Financial Resources
Set aside some of you rental income every month to build up a financial reserve. This is important in case there’s a sudden expense or an unexpected emergency. Maybe you’ll have a longer vacancy and you’ll need to cover all the expenses on your own for a month or two. You need to have a financial buffer. California is an extremely tenant-friendly state. So, if there’s a repair that’s needed on your property, you’re legally required to fix the problem immediately. Don’t spend everything you have on a property and then be left with nothing in savings.
Understand the Rental Laws
You need to understand and comply with the local, state, and federal laws that apply to rental properties. If you’re not sure what those are or you don’t think you’ll be able to keep up with the changes, consider working with a professional property manager. Investing in real estate comes with a lot of liability, and you don’t want to find yourself on the losing end of a dispute, claim, or lawsuit.
Property managers can protect you and your property from bad tenants, dishonest vendors, and anyone else who might try to take advantage of you. This property is something that will make you money for as many years as you hold onto it. Make sure it’s in good hands.
We are happy to help you with any additional questions you might have. Please contact us at Real Estate Connections if you have any questions.