Tips To Buying A Rental Property That Cash Flows (Part 1)
Wanting to foray into some form of commercial real estate but don’t know where to start? This article may be the one for you as it goes over some basic tips to help purchasing the right rental property that cash flows!
Just getting into real estate for purchasing a home can feel overwhelming and this overwhelming feeling does not stop at commercial real estate. In some ways successfully participating in commercial real estate can be even more complicated or overwhelming. With that potential complexity, here are some things that would be prudent to start with before beginning your journey into securing cash flowing real estate!
1.) Set Expectations and Goals:
Although this step may seem obvious but it is often a step that is either overlooked or brushed through without the proper amount of consideration. This is unfortunate as this planning stage is an incredibly important part of the process. When setting your goals and expectations, there are a few things that should be covered:
Why do you want to own a cash flowing property?
Whether it’s a goal of wanting to make enough passive income to quit your job, just as a method of bolstering your investment portfolio, or you just want the freedom to travel more. Figuring out why you want to own a cash flowing property is important as it will help structure what the right decision for property ownership will be.
How much are you seeking to make from your cash-flowing property?
Once the reason for wanting a cash flowing property is determined, this will help set up an income goal for that investment property. Having that income goal is important for informing the long term decision of what kind of investment property is best for your situation.
What type of investment would work best for your goal?
With both of the questions above answered, it is now time to determine what type of investment property will be the best fit when trying to reach the goals stated above. For example, if you know that you’re just trying to bolster your yearly earnings through passive income, owning a couple of 4plexes that cash flow about $250 dollars a month per unit could be an ideal property investment for you.
These questions are crucial to answer before proceeding on the journey into commercial real estate as it enables and informs the other steps in the planning stages.
2.) The Budget:
Once the goals and expectations for your investment party are set, it is a great time to then use the information from the previous step to help create a budget. Knowing how much you tenably can spend on an investment property without spreading yourself thin is paramount before swinging into action.
Luckily, setting a budget is actually a much simpler task than most people think it will be. This is because there are only a few variables to consider when making your budget:
How much you’re willing to spend:
Figuring out how much you’re willing to invest into real estate is important. Some people are willing to invest upwards of 50% of their wealth into investment properties while others won’t invest more than 25% of their wealth into real estate. Once you have that amount in your mind, multiply it by five to determine the amount of property you can afford.
Whether or not you’re willing to ‘house hack’:
Being willing to participate in ‘house hacks’ can be a very advantageous way to enable your determined budget to have more value. One of these methods is to stay in a unit or room of your investment property while renting it out. This is to qualify for a FHA loan which has much lower interest rates and can allow you to acquire a property at a much lower cost. You also only need to live in that property for the first year!
3.) Learn How To Forecast Cash Flow:
If you’re purchasing a rental property, chances are that you’re purchasing it because of the monthly passive income you’ll gain. However, it is important to remember that not all properties will be able to cash flow so picking the right investment property is paramount.
Knowing how to forecast cash flow or being able to model financials is vital in determining whether a chosen property is a good deal and is a property that will help you achieve your financial goals. This part of the process can take some research and understanding. When trying to model future cash flow on a property there are plenty of free tools and information available online. However, if this part of the process already seems overwhelming, do not hesitate to outsource to a real estate agent, especially considering how many talented and eager real estate agents there are in Tucson, Arizona.
4.) Choosing A Market:
Now that you have your goals and budget for the investment property set up and a way to forecast future properties’ cash flow potential it is time to choose a market. A good place to start when deciding a market is to choose a location that is nearby. Choosing a nearby market is usually easier as if you were to invest in an out-of-state market you’d need references for great realtors, property management companies, and contractors. Luckily, if you are forced or decide to invest in an out of state market, there are some resources to simplify finding those resources previously mentioned.
With all of this mentioned, this barely scratches the surface on things that can be done to help bolster your chances of success within the world of commercial real estate and finding a cash-flowing rental property. It’s because of the depth and complexity of this topic that it is always urged that if you’re feeling overwhelmed by this process, do not hesitate to reach out to an expert to at least get guidance!