Even though investing in a rental property can be a method of earning some passive income, anyone looking to invest in real estate has to dive deep into the responsibilities (both upfront and long-term) investment strategies, the real estate market, and the long-term potential for growth, or even the potential for a decline in the value of the property. When investing is simply approached from the viewpoint that you can sit back and let the money roll in, there’s a good chance that you’re missing out on some big responsibilities.
One of the biggest concerns for many is the challenge of getting the initial funds, and First Western Federal Savings Bank is a non-recourse loan lender who can help. Using your self-directed IRA, you can obtain a non-recourse loan in order to purchase your real estate property. Learn more about non-recourse loans and real estate here. The catch with this process, however, is that there are certain criteria that the investment property must meet:
- The property must have its own roof.
- It must be located within the U.S.
- It must be appraised at $70,000 or higher.
- Property types can include houses, townhomes, and certain condominiums.
When shopping for an investment property, here are a few more things that you should keep in mind.
The three rules of real estate are: location, location, location. With this in mind, you won’t want to purchase a property in a neighborhood where people won’t want to live. Above all, you want to know that if one renter moves out, that you’ll be able to fill the vacancy quickly. If you’re investing in a college town, filling a vacancy will be much easier. On the other hand, if you’re located in a small town with steady homeowners, it may be more challenging to find renters. Also, keep in mind that there are some towns that discourage rentals by adding permit fees.
Even though a rental property can bring in some money each month, there are also regular costs involved each month, including property taxes and the mortgage on the property. Property taxes will vary, so do some research before you start making offers on homes. You can talk to the local municipality’s assessment office to find tax information. And while you’re there, be sure to ask about any potential tax increases in the future.
High-quality schools will attract families with young children and possibly older adults going to college or continuing their education. Even though schools only indirectly affect the value of a property, it’s an essential consideration if you want to set a rent amount that will offset your costs.
Along with quality schools, crime is another important factor that will influence a renters decision on where to live. Look at crime rates for vandalism, serious crimes, and petty crimes. You’ll also want to note whether the crime rate has been increasing in the area or if it’s declining, and consider asking around to get an idea of how often police patrol the area. Whoever you end up renting to, they will want to know that the neighborhood is safe.
If there are jobs available in the area, there’s a much higher chance of being able to fill your property rental. To check the current job market in your area, you can visit the U.S. Bureau of Labor of Statistics. Also, look out for any announcements that a company is moving to the area.
Renters want to live where the amenities are, right? Popular amenities for a neighborhood include parks, grocery stores, restaurants, public transportation, entertainment, and gyms — essentially anything that people will want to see or do outside of their working hours. Generally, the closer these amenities are to the rental property, the better. However, keep in mind that some renters want to be further away from traffic and city life in order to enjoy some peace and quiet.
Development, whether it’s housing or commercial, can be both good and bad. An increase in housing and retail spaces means a higher potential for renters and being able to offer them a range of amenities. The downside with housing development is that other properties could compete with yours and could have a negative impact on the price of real estate.
Number of Current Vacancies
If possible, look into how many vacancies there are in the area. If there are a lot, it could simply mean that it’s a slow time of year; for example, it’s summer and college students have moved home. It could also mean that the neighborhood is losing population and there will be fewer people needing to rent. Obviously, a decline in population is an indicator that you may not want to purchase in the town.
How much you can charge in rent will determine how much you’re earning each month. Look at comparable properties and find out how much they are charging. This will give you an idea of whether or not the income will be enough to cover the mortgage payment, taxes, and other maintenance costs. When you researched property taxes, if you learned that there may be an increase in the next year or two, take the potential cost increase into consideration.
The overall cost of the property may be one of the biggest factors to look at. With non-recourse loans, the cost of the property needs to exceed $70,000. But you also want to consider your own budget and how your IRA can help. Look into how the area may develop in the next few years to determine the potential for market growth.
The structure and makeup of the home itself is also a significant factor. If your target renter is a family with kids, make sure there are enough bedrooms, bathrooms, and a yard. When you complete a home inspection, look into the age of the roof, the condition of the foundation, if there are new windows, plumbing, and HVAC. With a non-recourse loan, the home needs to be built after 1940, so this should cut down on any potential issues that stem from old age. Regular maintenance will be needed regardless of how old the house is, so be sure to budget for any potential fixes or repairs.
Finding the right property to invest in is a large part of the process and deserves a considerable amount of research time and forethought.
At First Western Federal Savings Bank, we will do what we can to ensure that you are successful. And that starts with a reliable loan. With your self-directed IRA, you can apply for a non-recourse loan, which will protect your assets in the event that the loan goes into default. Learn more about purchasing rental property with a non-recourse loan and get in touch with our team today. We are a non-recourse loan lender that provides reliable service and honest loans.