What You Need to Know Before Buying Rental Property

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RENTAL PROPERTY: THE BIG PICTURE

When owning real estate, it’s important to focus on the big picture. I personally don’t buy property to rent out immediately. Instead, I buy property to enjoy for at least a couple years and then rent out after I’ve accumulated enough funds or want to live somewhere new. The idea is that if I’m willing to live in the future rental property I’m buying, so will others.

* It’s all about income. As a real estate investor you must ascertain what is the realistic income the target property can generate on a sustainable basis every year. Once you have an income range then you can calculate a property’s gross rental yield and price to earnings to compare it with other properties on your acquisitions list.

* Price appreciation is secondary. One of the big reasons why there was a housing collapse was because investors moved away from the income component of property and just focused on potential appreciation. Investors didn’t care they were hugely cashflow negative if they could ride the wave and flip within a year or two. Once the party stopped, speculators got crushed, which caused a domino affect that hurt neighbors who planned to buy and hold. If you are primarily focused on property appreciation and not income, you are a speculator.

* Property prices historically rise closely with inflation. Property price appreciation generally tracks inflation by +/- 2%. In other words, if the latest inflation figure is 3%, you can expect a 1-5% increase in national property prices. Over the years property price changes can fluctuate wildly. But if you look at property prices over a 10 year period you’ll see a relatively smooth correlation. 10%+ annual increases are unsustainable because eventually property prices will become unaffordable as wage growth fails to keep up.

* Property is always local. Be careful not to extrapolate property statistics. Just because one report says national prices are up 10% doesn’t mean you can sell your San Francisco home for 10% higher than a year ago. Property price statistics tell you the general direction of prices and the relative areas of strength. The most realistic value for your property is if your neighbor sells and has a very similar layout."

Read the full article here: https://blog.personalcapital.com/investing/what-you-need-to-know-before-buying-rental-property/