Are you thinking about buying a rental property in Atlanta? If so, you've come to the right place.
Even though owning a rental property is a smart investment, there are several things that you should look for in an investment home.
1. Determine if buying an investment rental property in Atlanta is right for you
Forget the TV sitcom stereotypes of clueless landlords. To make the most of income property requires an accountant’s eye for detail, a lawyer’s grasp of landlord-tenant laws, a fortune teller’s foresight and, should you choose to manage your rental property yourself, a landlord’s firm-but-friendly disposition.
“Where people who want to become landlords fall short is, they don’t realize how much work goes into it,” says Diana George, founder of DG Design Group.
So before you leap in, you’ll want to consider whether you have the time, willingness and skill to put into managing a rental. While rental property is considered a passive investment, that doesn’t mean you’re fully passive in managing it.
Over the long-term, real estate investments may compare favorably to other long-term investments such as stocks, but the results can vary significantly depending on the circumstances of the region and specific property. You’ll want to consider whether you think you can increase rent payments over time and why the economy surrounding the property would support that, among other issues. Whether or not you finance the property and the terms of any financing can have a significant impact on the return you ultimately earn.
If managing an investment property sounds like too much, but you’re still interested in real estate, you might consider owning a real estate investment trust, or a REIT. REITs are publicly traded securities that invest in real estate and typically pay a large percentage of their earnings back to investors in the form of dividends. This may be a way to get exposure to real estate investing without the hassle of property management.
2. Buy or finance? Analyze which is better for you
While some financial pundits insist you should never buy a rental unless you can pay cash for it, Jeremy Kisner, a senior wealth adviser at Surevest Wealth Management in Phoenix, begs to differ.
“Leverage (that is, a mortgage) typically magnifies returns, on both the upside and downside,” says Kisner, who owns two rental properties in Las Vegas.
For example, imagine a rental property purchased for $100,000 in cash. The house yields a rent of $12,000 annually after all expenses, such as maintenance and insurance, and is taxed at $1,000. With a depreciation schedule of 27.5 years and an income tax rate of 20 percent, an investor would earn just over $9,500 in cash annually. So the investor’s annual cash return is about 9.5 percent. Not bad.
Here’s how the investor using leverage performed, assuming the same house. This investor has a mortgage for 80 percent of the house, which compounds at 4 percent. After subtracting the operating expenses as well as additional interest expenses, this investor earns almost $5,580 in cash annually. With $20,000 invested, the investor’s annual cash return is about 27.9 percent.
In fact, the situation for the leveraged owner is actually a little bit better than these numbers suggest. That’s because part of the rent goes to pay down the mortgage’s principal. So while the investor couldn’t pocket the cash flow because it was used to pay the loan, the investor still profited (and paid tax) on that money.
That’s the power of leverage to swing an investor’s return.
George concurs: “I definitely agree with going conventional (mortgage). It’s a really good way to maximize your dollars.”
If you do decide to finance the purchase, keep in mind that you’ll need to come up with a larger down payment than what is typically required for a residential mortgage. Most lenders require a down payment of at least 15 percent for an investment property. You’ll also need to have enough cash to cover closing costs, homeowners insurance, property taxes and maintenance issues that come up at the property.
3. Find the right location
That old realtor mantra about the importance of location takes an interesting turn when applied to income property.
“The best locations with the most appreciation are where you’ll potentially have the worst cash flow with a rental,” Kisner says.
Why? Investors can earn a return in two ways: cash flow and appreciation. In some areas investors may want higher cash flow in order to compensate them for slower appreciation. But if investors expect an area to appreciate substantially, they may be willing to forgo some of the cash flow in order to enjoy that appreciation. The result: house appreciation outstrips the growth in rents, and houses appreciate while yielding relatively low cash flow.
“As a result, the property has to appreciate more in order to compete as an investment with properties in less desirable areas,” Kisner says.
His solution: Err on the side of appreciation. That’s what he’s doing with his two rentals, which, in a good month, barely break even. “But if I hold them until I turn [age] 60 when they’re paid off, even after property taxes and insurance, I’ll double my Social Security income,” he says.
Contact JD Homes
At JD Homes, we specialize in local property management for the Atlanta GA area. To learn more about the services that we can offer you contact us today by calling (770) 506-2630 or click here.