Buying your first investment property is a huge step for any investor. I believe that the first piece of real estate you own shouldn’t be a personal residence but a rental property. This way you own an asset, not a liability. Owning a rental property is a great way to invest because it puts money in your pocket every month but there are many risks involved so make sure you know what you are getting yourself into.
Here are some you need to know before buying your first investment property.
- Decide which type of property is right for you
To start, you need to decide on the type of rental property to invest: residential or commercial properties. Residential properties would be a great starting point for first-time investors. Keep your investment as low as possible initially.
First, you need to decide where you want to invest. Look for an up-and-coming neighborhood before the value increases can deliver a high return on investment. Depending on the location and the clients you are targeting, you need to research the available rentals in the area and determine the type of property that would attract tenants.
Regardless of where you invest, you need to find the right property which is in demand in the area you are investing in. You should understand the type of residents in the neighbourhood. If you are looking into a family neighborhood, investing in a two or three-bedroom home would be a better choice.
- Conduct due diligence
Due diligence is a complete assessment of the property you are buying. It evaluates all the information about the property and the market to determine if the property is suitable for you. Proper due diligence is one of the most important steps in purchasing a property, especially rental property.
No matter the type of property you are buying, you need to know the physical condition of the property, the financial history, and even verify the title and legal documents.
- Evaluate your return
One of the main reasons people invest in real estate is to create income. The basic idea is that the income from the investment should be higher than the expenses. Return on investment is the metric used to determine whether the property is worth investing in.
Before you buy, you need to estimate any expense and the potential income the property could generate.
- Make sure you have cash reserves
There will be many times when your rental could be empty with no tenants. You need to factor in upkeep costs, vacancies, and maintenance. Always set aside 20% of your rental income as a contingency fund.
- Understand your legal obligations
Before buying a property, you need to make sure it has a clean title. This means that there are no outstanding debts on the property and that no one else has a claim to its rights. As a landlord, you need to be familiar with landlord-tenant laws in India. It’s important to understand your rights, as well as the tenants regarding security deposits, rent hikes, eviction rules and, have a written agreement with the tenant to avoid legal hassles.