Real Estate Investment: Maximizing Returns in a Changing Market

Real estate is one of the most talked about methods of building a portfolio of passive income. But what does investing in real estate actually behold? How do you ensure that you are creating profit? What comes with investing in your first property? Once you have taken that first step, how do you maintain cash flow and expand your portfolio? These are just some of the innumerable questions that must be answered in order to reach your desired income from rental properties.

Before investing in my first property, I must analyze my financial stability and the macroeconomy:

• Is there an emergency fund that can cover 6 months of expenses?

• Do I have around 10-15% of your income going toward 401(k)?

-Ideally, 50% should go toward necessities, 30% toward wants, and 20% in savings and 401(k)

• Am I willing to lower my discretionary income?

• Do I have enough money to cover expenses of a property in the vacancy period?

• What would interest rates look like?

-https://www.calculator.net/interest-rate-calculator.html

-Current average interest rates spiked from sub 3% in 2021 to 7%

• Do I have a solid credit score?

-Consider having at least a score 700

Once the prerequisites for beginning the process of purchasing a property are met, I should commence to seek advice and tips from experienced investors. Ranging from my own parents to full time professionals, learning from others’ successes and failures is one of the most important stepping stones toward building my own successful portfolio.

There are four primary monthly expenses that come with owning a property:

• Mortgage

-Principle and interest of your loan used to buy the property

• Property tax

-Tax rate varies by state

-Hawaii, Alabama, Nevada, Colorado, and Idaho are top 5 states with the lowest property tax rates

• Insurance

-Covers damage and repair

-Cost varies by plan

• HomeOwners Association fees

-HOA manages planned communities of behalf of the community’s developer

-Varies based on the community

• Property Manager

-Handles and oversees day to day operations of the property

When venturing into the realm of buying a rental property, careful consideration of fundamental costs is paramount for a successful investment. Particularly for first-time buyers, seeking properties in an environment of exceptionally low cost of credit, characterized by low-interest rates, becomes crucial to minimize the burden of monthly mortgage payments and maximize potential returns. Additionally, it is essential to research and compare property tax rates in different states, aligning them with your budgetary capacity to make an informed choice. Striking the right balance in the community you select is equally vital – opting for a developed area that attracts potential tenants while being cautious not to choose an overly high-end locale to keep HOA fees at bay. Recognizing the importance of property management is prudent, especially if your full-time occupation leaves little room for property maintenance. A property manager acts as a valuable asset, ensuring the property's well-being and handling tenant selection with expertise. By attentively weighing these factors, your journey towards buying a rental property will be based on a solid and accurate foundation, setting you up for a rewarding investment experience.

In their real estate investment endeavors, individuals should prioritize ensuring that the rental income generated from the property surpasses the mortgage and other expenses. They can achieve this by collaborating with property management firms to secure reliable tenants who can meet their rental obligations and generate steady cash flow. As they successfully establish a consistent cash flow, they may consider expanding their investment portfolio, leveraging their experience and expertise to build long-term financial gains. Maintaining multiple rental properties becomes more manageable when working closely with property management firms as they efficiently oversee and track each investment.

Biggest Risk/Mistake with Having Rental Properties

Vacancy rates pose the biggest and most overlooked threat of being a landlord. One cannot dive into real estate investments without being prepared for times where properties will be vacant. The landlord should be ready to be responsible for paying the monthly expenses of the property when there is no tenant. It is burdensome to constantly keep a property occupied as there will be times where one tenant’s contract expires, and finding a new tenant always takes its sweet time.

Is Now a Good Time to Buy Rental Properties?

The Federal Reserve has been raising interest rates since the beginning of 2022. In its recent meeting in July, however, the rates were kept steady. During times of inflation, the Fed raises nominal interest rates in order to reduce the money supply. Investment goes down after nominal interest rates are high since money is now more expensive. Due to the cut in money supply and lowered investment, inflation mildens.

Interest rates are currently relatively higher due to price level inflation. A downward trend for interest rates may be highly likely, however, since the Fed has decided to keep interest rates the same in their most recent meeting as price levels have been lowered over time to combat inflation.