Maximize profits with a fixer-upper
Home improvement projects have inspired millions to attempt a quick real estate flip–tearing out walls, installing wood floors and more. You can buy a structurally sound fixer-upper property in a great neighborhood for pennies on the dollar, make some minor upgrades, decorate it like a magazine, and sell it for a huge profit, right? Well, it depends.
Sometimes selling is tough—consider your options
Unfortunately, many would-be real estate flippers overspend on the property to be flipped, price it too high to cover their mistakes, thus making it difficult or impossible to sell. There is another option, however–renting out that newly renovated house can provide you with a steady income while diversifying your assets. If your property is in a good location with easy access to schools and shopping, it should make an attractive rental in any market.
Do you have what it takes to be a landlord?
Do your homework before investing. Do you have enough funds set aside for maintenance? Will you be available 24/7/365 for calls from tenants? If you look at the situation realistically and understand the commitment, it can indeed be a lucrative investment. Most specialists concur that you can earn a ten percent return on your investment in rental property.
Run your numbers
Here’s an example: The value of your property is $300,000 and taxes are $5,000 per year. In your area, it should rent for $2,500 a month. With a 30-year mortgage at 4.5%, you can get a loan of $270,000 with a down payment of $30,000. Your monthly principal and interest will total approximately $1,400, not including insurance (to be determined) and taxes. So, with $2500 monthly income and a payment around $1800, it sounds like you can expect a profit of $700 per month, right? Not so fast.
Spend some time and run all the numbers to determine what your projected expenses and income might be as a landlord. Beyond the initial purchase price, you should allow one percent a year of the property’s value for minor repairs. The standard used for projecting vacancy rates is between five to eight percent.
Factor in landlord protection insurance
Your new rental property is a big investment, and it’s essential to protect it with the right type of insurance. Landlords in Colorado should consult with a top-rated independent insurance agency like the Noel Selewski Agency to learn more about what they need based on their personal situation.
Back to basics: What is insurance?
The definition of insurance is simple: it’s a safety net to protect people from unforeseen circumstances. Insurance is an agreement between two parties that provides protection from large expenses for a small monthly fee. Rather than considering it as an expense, it should instead be considered an essential part of financial planning.
What is landlord protection insurance?
Protection is the key word. As a landlord, it is critical that you are protected against possibly catastrophic losses. Landlord protection insurance primarily covers the physical structure of the property you are going to rent out. Be sure to take your time with a trusted independent agent to get the coverage you need at an affordable rate. It’s critical to understand what is covered and what is not.
Smart landlords purchase personal umbrella policies
Every standard insurance policy contains dollar limits for their coverage. For this reason, most landlords strongly encourage purchasing a personal umbrella liability policy. It is normally sold in increments of one million dollars, and it can be invaluable in protecting your assets from lawsuits and more. It’s a relatively low-cost way to give you peace of mind and protection from potentially catastrophic losses.
Note that in Colorado, landlords are not required to compensate their renter for damage to the renter’s personal property. Your lease agreement should include a clause requiring the tenant to purchase renter’s insurance. Renter’s insurance is usually very affordable and may cover not only damage to personal property, but theft and other types of loss.
Weigh the pros and cons
You must make the determination if this option is right for you. With every financial decision, you should weigh the pros and cons. Here are a few to consider:
- If real estate values increase (as they have historically) your investment may appreciate for a gain down the road
- Income from your rental properties is not subject to Social Security tax
- There are many potential tax deductions you can take on your investment property
- Real estate is a tangible physical asset
- The monthly rent may not cover your total expenses
- Property is a fixed asset. Unlike liquid assets like stocks or cash, you can’t instantly sell real estate
- If you don’t have a renter, you still need to pay all the expenses, including utilities
- You may get a renter who doesn’t pay on time and you may require legal assistance to enforce the lease
Be patient and realistic
Be realistic with your expectations and patient as you learn through experience. There will be bumps in the road. Rely on your trusted insurance partners, the Noel Selewski Agency, for advice and help with any questions you may have.
Contact one of our independent agents today to discuss the best property insurance for you: