If you're thinking about diving into the world of
investment properties, the idea of buying one to rent out is still a pretty tempting option. It gives you a sense of security in the world of real estate and a chance to run a side hustle as a landlord. But, even though the property market seems sturdy, there's more to real estate investing than meets the eye.
So, let's take a closer look at some important things you should consider before you make that final decision to buy.
Choosing Property Over Stocks
Some folks are moving away from the idea of buying to rent because they're enticed by the stock market. Sure, stocks have had about a 10% return on average over a decade, but real estate can often do better, especially in certain locations. Concerns about big investments and the risk involved have been around forever.
Financial Analysis
Calculate your potential rental income and expenses carefully. Ensure that the expected rental income will cover your mortgage payments, property taxes, insurance, maintenance costs, and property management fees (if applicable). A positive cash flow is crucial for a profitable investment.
Location, Location, LocationRemember the golden rule "Location, Location, Location." Research and select an area that has strong rental demand, low vacancy rates, and potential for property appreciation. Consider proximity to schools, transportation, employment centres, and amenities that appeal to potential tenants.
To get a good idea of what kind of returns you can expect, start by checking out rental prices for similar properties in your area. The closer your rent is to the market rate, the easier it'll be to find tenants. But that also depends on what your property has to offer.
Thinking About Your Potential Profits
Investors call it "Rental Yield," and it's pretty easy to figure out. Take the annual income your property generates from rent, divide it by the property's value, and express it as a percentage. For example, if your property is worth R4 million and brings in R480,000 a year (or R40,000 a month) in rent, your rental yield is 12% per year.
Generally, a rental yield of around 5% to 8% is considered a reasonable range in many real estate markets. However, in some high-demand areas or during certain market conditions, rental yields may be lower, while in other areas with lower property prices and strong rental demand, they may be higher.
Getting Expert Advice
Whether you want to extend your mortgage or explore different loan options, the choices might seem similar. The big question is whether you should go for a fixed or variable interest rate. Both have their pros and cons, but if you're not experienced in this area, it's a good idea to chat with a seasoned property expert or mortgage advisor.