This is a guest post by Jason Hartman.
Acquiring real estate can be an important and involving act. Whether the goal is to build wealth for retirement or tax-free, here are our tips for a successful real estate investment in 2018.
- Evaluate its investment capacity
Evaluating your acquisition capacity is the first step to making a successful investment in the rental real estate. This estimate will help define its budget, and therefore the type of property that will be researched and negotiated. The first step is to consult your bank to determine your disposable income and the maximum debt capacity that can be dedicated to this real estate project. This simulation is not an end in itself, it is only a first step to define the budget that can be allocated to the acquisition. The goal is not necessarily to go into debt at 100% of its possibilities. A real estate acquisition should not fall below the monthly budget.
On the contrary, the necessary saving effort must be measured and optimal. In the best of cases, it should be able to leave room for a second investment in the more or less long-term. For example, it may be advisable to allocate investment between two assets when possible, for example by purchasing two small studios instead of just two rooms.
Before launching into real estate, the simulation thus gives the maximum acquisition capacity. In the context of the rental real estate, future rent will be taken into account in the calculation of the financing. For the best-optimized credits, the rents will be close to the amount of the monthly payments. The best thing is that these two sums are equal: this is called “self-financing”.
- Define the right location in a city that we know
To succeed in real estate, the objectives of an investor are to have tenants quickly, that they are stable and that they regularly pay their rent. Of course, these fundamentals should not be lost if you want to succeed in your investment. Also to put the odds on your side, it is necessary to put on the skin of the future tenant. It is par excellence in a known environment that we can at best project the expectations of future tenants. In real estate, the best way to miss his investment is to buy in a city that we do not know and without having moved.
This can lead to buying a perfect apartment on paper but never find takers or to pay too much. Put yourself in the shoes of a tenant is also validate the location within the city: is it easily accessible (proximity to transport, main roads)? Is it easy to shop, drop off your kids at school? Is the neighborhood safe from day to night?
- Define the type of good sought
The two previous points made it possible to define a maximum budget and a search area. It remains to define and find the ideal good. Should we choose a studio, 2 rooms, a lot of parking? Buy Pinel tax exemption law? It is important to understand that a real estate investment is something personal: the ideal good is different for each person. Upstream, the future investor will have to determine his objectives to make his choice on the best type of property possible. Several motivations can indeed push to invest, of which the most current are: to constitute a patrimony for a supplement of retirement, to tax, to buy a home to accommodate his children or parents later, to finance his future second home by renting for a few years …
- Use the right search methods
Several ways are available to find the ideal property, with the Internet in the first place. The web is full of real estate ads. It is easy to make a selection of properties corresponding to its budget and its area of research. Going through local real estate agencies can help save time, as they can offer properties they have for sale. While the use of real estate agents is traditional, other means are less well-known, such as hiring the services of a real estate hunter or wealth management advisor. After having identified the client’s project (investment objective, geographical area, type of property, etc.), these professionals search for corresponding properties. This avoids having to visit each property or losing hours on the Internet to explore every offer of each site.
Interesting point: the specialist real estate hunter can direct his clients towards heritage assets allowing an optimization of the investment, like a Pinel law, the property deficit (if works), the bare ownership or the Malraux law. Note: these services are not more expensive since as a traditional agent, these professionals are paid by a commission once the sale is completed.
- Lose the “instinctive” side of your choice
The “heart stroke” is the number one enemy of the real estate investor. Unlike the acquisition of a principal residence, the rental-purchase is based on practical and rational criteria, with the quality of the location and the potential profitability of the site. These two criteria are directly related to the wishes of a tenant: to have a housing close to its amenities in a reasonable budget. The housing acquired must please a maximum of people. Better to forget the charm of the atypical or a campaign too remote, and keep in mind that few tenants are willing to pay more for accommodation “heart”. Prefer rational spaces (right angles) and functional (closets or storage, kitchen …) and remember that we do not choose the housing for itself but to have a maximum of luck to rent easily, sustainably and in a way that is profitable.
- Do not rush to invest and always visit
Investing in real estate is not usually an act that is often repeated in one’s life. However, it is possible that the bargain is not on the market pile when the future buyer seeks it. If necessary, do not hesitate to postpone your purchase. Be careful, however, not to postpone the purchase for the wrong reasons! Today, the logic of investment is that of an investment. To be optimal, it must balance the objectives and constraints of the investor. Thus, not rushing means taking the time to validate the site, learn about the rental market, visit and compare the prices and benefits of several properties. When a property appears to meet its expectations, go in person, sometimes this helps to avoid big disappointments.
Remember that, you must always visit and be aware of what you buy. Humor the atmosphere of the neighborhood, look at the condition of housing or validate the location of a future construction is a sine qua none condition to any real estate acquisition, even if the housing is not intended to be a day inhabited by his owner. In any case, it is imperative to keep in mind that a real estate property meeting all criteria is often difficult or impossible to find. Learning to make concessions is essential. Without ever sacrificing either the quality of the site or the potential profitability of the investment.
- Evaluate the profitability of selected properties
The profitability of a rental investment is paramount, whatever the objective. The examination of this criterion could, in particular, make it possible to compare two goods before choosing one for the purchase. The gross yield is the annual amount generated by the investment, compared to the sum that had to spend to get it. It is expressed as a percentage. In terms of rental investment, it is calculated as follows: (Sum of annual rents – the sum of annual expenses) / purchase price of the property.
This profitability calculation is an approach allowing to compare properties between them. Indeed, in order to calculate a fair net return, it would be necessary to remove the taxes generated (income tax depending on the tax bracket of the future investor, property taxes excluding garbage collection and CSG) and the other taxes. Contingencies (insurance …) and to reinstate the tax benefit in the event that the acquisition allows (property deficit, Pinel law …).
- Getting closer to self-financing
Financially speaking, the best real estate investment is the one that is “self-financing”. That is to say that the rents collected cover entirely the monthly payments of the credit which is bound to him. However, few properties allow this for the purchase of rental housing without input. The goal is to obtain the best financing ratio rather than to achieve self-financing. Let’s go back to the previous example. By financing the acquisition of a real estate property at 100% by borrowing at a rate of 1.6% for 20 years, we arrive at a monthly loan of 620 euros for 322 euros rent. The saving effort is therefore nearly 300 euros per month.
To optimize financing and reduce your savings effort is possible to increase the initial contribution and reduce the amount of the credit. In the previous case, for housing to be self-financing it would be necessary to make a contribution of 50% of its price or 60,000 euros. Optimizing financing means finding a balance between the investor’s available savings, the savings effort he consents to, the amount of credit required for the acquisition and the rents generated.
- Find a good manager
In terms of rental investment, the manager is very important. Its role will be to find the tenants, to make the inventory, to collect the rents, to pay them back to the owner, and to manage the problems if some occur. However, not all managers are equal and it is very important to choose a good one to avoid disappointments. Let’s sweep away the misconceptions: big brands are not necessarily the best performers. To make the right choice, nothing like word of mouth…
- Subscribe to an Unpaid Rent Guarantee
When you invest in housing, you are exposed to tenants not paying their rent. If the monthly payments of a credit are at the same time to repay, it can plunge the owners into a difficult situation. The first rule: get into debt in reasonable proportions, so that a possible failure of tenants do not hurt the finances of the household. Second rule: guard against non-payment of rent by subscribing an Unpaid Rent Guarantee with an insurance company.
In most cases, the manager can offer the guarantee that he has himself subscribed in the context of a master agreement with an insurer. Some big brands even have this insurance in-house. For owners who take care of their own rental management, it is also possible to subscribe to an unpaid rent guarantee from an insurance company. Its cost is approximately 3% of rents. It is largely amortized in case of a problem.
About The Author
Jason Hartman is the founder of the Platinum Properties Investor Network, Inc. helping thousands of people to achieve The American Dream of financial freedom by purchasing income property in prudent markets nationwide.
