10 Ways to Avoid Losing Money from an Income Property
Real estate investing is a great way of making money. Maybe you shouldn’t expect high returns immediately after you purchase your first income property.
However, you have to eventually — sooner or later — make money from your real estate investment. This means that if for some reason you are losing money from your income property, you must act right away. Let’s see what you could do to avoid losing money from an investment property.
1. Perform a real estate market analysis
The first step you should always do before investing in an income property is to perform a real estate market analysis. This analysis will give you a very good idea of what you can expect from your target income property based on the characteristics and performance of other properties around. True, getting all the real estate comps that you need will take a lot of time and efforts, but it is worth it in the long run. Or alternatively, you can make use of Mashvisor’s investment property calculator to get all the numbers that you need within a few seconds of the start of your search.
2. Conduct an investment property analysis
Another step you should never miss before buying an income property is the investment property analysis. In this process, you will calculate the expected cash flow, net operating income (NOI), return on investment (ROI), capitalization (cap) rate, and cash on cash (CoC) return. All these numbers will reveal crucially important information about the profitability of your income property. For example, you should never ever invest in a rental property which brings you negative cash flow. That purely means that you will be losing money from your investment (at least in the short term), and as a real estate investor, you simply cannot afford losing money. Going for long-term investment when high appreciation is expected is great, but real estate appreciation cannot be your only goal. You should at least break even in the short run.
3. Use an investment property calculator
We live in the 21stcentury, and technology is an indispensable part of our life. So, instead of wasting time — because time is money! — on real estate market analysis and investment property analysis, make yourself a favor by getting a rental property calculator. Mashvisor’s one is an excellent choice. It will not only save you time and energy but also provide you with an amount of information that you cannot possibly obtain on your own within any reasonable time period. Moreover, an investment property calculator eliminates the possibility for a human error when making the computations.
4. Choose your location carefully
Location is one of the key variables in real estate investment. It will determine how much your rental property will cost, how much rent you can ask for, long-term appreciation, etc. Before deciding on a specific investment property, do a proper research on potential locations and how income properties have been performing there.
5. Consider various financing strategies
The two basic ways to buy an income property are in cash or through a mortgage. Few real estate investors — especially new ones — can afford financing a rental property fully in cash, but even if you can, maybe that’s not the best option. If you are getting a mortgage, explore several banks and different repayment schedules. Once again, an investment calculator will be very helpful in this regard as it allows you to input different financing methods.
6. Avoid hot markets
Most real estate investors are constantly on the search for the next hot stop in real estate investing. However, it’s hard to find a really good property in such a market because of the very high demand, and properties will generally be overpriced. So, don’t automatically disregard secondary markets which often hide some real income property jewels.
7. Consider out-of-state real estate investing
True, out-of-state real estate investing is associated with higher management costs (high transportation expenses, need for a property manager, etc.), but sometimes you just need to go outside the 20-mile radius, especially if you live in one of the hot markets like San Francisco, Los Angeles, and San Diego, where the median property price amounts to around $1 million. Investing in real estate outside your city and even state is totally doable and can actually bring you some good profits. So, think about this option instead of settling for losing money in your own market.
8. Choose your tenants carefully
Two things decide your profitability from an income property: costs and rental income. Tenants have a strong impact on both of these variables. After you purchase your income property and prepare it for renting, make sure to allocate the necessary time — and efforts — to choose the right tenant. The process can get quite tedious, taking days and weeks, between reading applications, arranging site visits, and having interviews. But this investment is totally worth it. You want to make sure you end up with tenants who will not destroy your income property and who will pay their rent on time. If you don’t receive your rental income, you will automatically start losing money from your investment property because your income will be zero, while your costs will not go down. Similarly, if your tenants cause so much destruction to your property that it requires major maintenance work, this will factor in the costs and bring down your profitability.
9. Avoid property management
Sometimes you are just too busy (having a full-time job or owning too many investment properties) or your property is too far away, so you have to hire a professional property manager. Well, these people cost money. Thus, if you have any doubts whether you might actually be losing money from your income property, don’t get property management.
10. Think about traditional and Airbnb
If you look at the figures provided for individual properties as well as neighborhoods on Mashvisor, you will realize that traditional and Airbnb rental strategies offer very different profitability. It’s impossible to say which one is the better strategy in general — it depends on the location and on the property. So, consider both options before buying an income property and renting it out. Make sure you check out relevant Airbnb legislation operating in your market to avoid high costs or problems with the local authorities.
There are many questions in real estate investing on which experts cannot reach a consensus. However, one thing on which everyone involved in this business agrees is that you should not lose money from an income property, even in the short term. If you follow the 10 steps outlined above, you should be on the safe side, able to avoid losing money from your property.
Originally published at www.mashvisor.com on February 16, 2017.