Now that you have finally reached the point of having enough money to make a sizeable investment, you have to decide where best to go. No matter what form of investment you choose to make, you need to do your due diligence to ensure your investment is well-protected from any risks associated with this type of investment. For example, would you place your money with a bank that did not have Federal Deposit Insurance Corporation insurance? Stocks are even harder to protect; you need to use a reputable brokerage who offers protection from a downturn in the markets.
Due Diligence That Goes On
If your preferred form of investment is stocks, you must exercise due diligence for as long as you own them. This same thought also applies to investing in real estate as your due diligence ends only after you have divested yourself of the property. If you plan to invest in rental real estate, there are six different factors you must be aware of, before you get started.
- Your Required Rate of Return
Owning rental properties has one goal, to generate income that can be reinvested until you reach your desired levels of investment. We are talking about net income rather than gross income. For example, if you need a 5% rate of return on your investment and your annual income from the property is $12,000, you should not invest any more than $240,000 in the rental property (formula income/rate of return – 12,000/0.05=240,000).
- A Reputable Broker
Always use a reputable broker to help you locate investment properties and negotiate the best deal for you. Your broker should also exercise due diligence with regard to researching the information provided by the seller. Be sure to thoroughly research any broker before agreeing to work with them.
- Verifying Income and Expenses
It is your job to inspect the current owners rent records and verify information such as, move in, and move out dates. If you notice a very recent move in dates, you may want to question this.
Have a thorough inspection completed. The inspection should include reports covering pests, termites, and the condition of the structure itself. Be sure it covers the roof, electrical and plumbing systems, and the basement or crawlspace. Your ROI will be affected by the cost of any repairs.
- A Professional Property Manager
Hiring a professional property manager and keeping yourself up to date on the latest in landlord-tenant laws covering the property puts a skilled and trained person or company in charge of everything. Leaving you with more time to spend hunting for your next investment property.
- Your Insurance
Make sure you contact your home insurance company to ensure you have adequate coverage for your new rental property. Owning rental homes comes with many risks, and you need to know you are covered in the event of an accident or a liability situation. There are definite risks involved in owning rental properties that don’t exist with other forms of investment, but if you pay close attention throughout the entire experience, it can be quite profitable.