If you’re investing in a Santa Cruz property for the first time, there are a few things you need to know. The California market is unique, and we’re here to help you get started.
Real Estate Requires Financial Resources
You need money. There’s no gentle way to explain this; you simply cannot invest in this area’s real estate market without financial resources. If you don’t have any money right now, you don’t need to read the rest of this blog. Just put it aside and come back when you do have some money. Spending everything you have on one investment property is risky. In California, the down payment alone will need to be at least 20 percent of the purchase price. Once you have your down payment in order, you’ll have to find a mortgage broker who can help you get a home loan. That process will also require that your financial house is in order. If you don’t have the financial resources available to invest in a property, think about different investment options or come back to you real estate plans once you’ve saved some money.
Get to Know the Market
Understanding the rental market and how it works is also critical to successful investing. If you’re comfortable in the sales market, that’s great. But, the rental market is a little different. A home’s sales price is much different than a home’s rental price. You’ll need tools and resources to determine a home’s rental value. It’s never a good idea to buy a property without knowing what it will rent for. Check out what properties similar to yours are renting for in the same neighborhood. This will help you establish a rental range, which you can use to determine whether a particular investment is a good idea. Once you know how much rent you’re likely to bring in, you can calculate your expenses and get an idea of what your cash flow will look like.
Look at Potential ROI
The return on your investment – or ROI – requires you to think in the long term. Many investors worry about buying property in California because there’s a high probability that you’ll have a bit of negative cash flow. This is not necessarily a bad thing. If you have the opportunity to own property in Silicon Valley for only $500 or $1,000 per month, won’t you take it? Of course you would. And with your tenants paying for a good part of your mortgage and other expenses, you’re still earning a healthy ROI. There’s no need to worry about a small negative in your cash flow. You’ll continue to earn equity in your property while your tenant is paying a portion of your mortgage debt.
You have many tax advantages to plan for as well. Many tax deductions are available, including deductions for property taxes, mortgage interest, and insurance payments. You can write off your fees for property management and other professional services. You can also write off maintenance and repairs. All these benefits will offset any negative cash flow and provide an impressive ROI. Consult with your CPA for more details on tax benefits.
Location Matters with Investment Property
Location always matters when it comes to real estate, and when you’re a novice investor, knowing the market you’re buying in is critical. When you are preparing to purchase a property, pick one in an area that you already know well. If you’re already familiar with the school district, the commuter routes, and the dining and recreation hotspots, you’ll have an idea about the tenant pool, the demographics, and the community itself. Eventually, you might want to invest in other markets, but your first investment should be close to home.
Accumulate Financial Reserves
We already expressed the importance of having money when you’re buying an investment property. Not only do you need money to buy it, you need money to maintain it. Be sure you have enough money set aside to pay for unexpected repairs, major improvements, and all of the unexpected disasters that you don’t see coming. Without a cash reserve, you could struggle to make the necessary repairs. That’s not going to work in California, which is a tenant-friendly state. Habitability laws require you to make repairs right away when something breaks.
California Landlord Tenant Laws
Rental laws in California are some of the strictest in the U.S. It’s a great place to be a tenant, and a challenging place to be a landlord. You’ll need to comply with a long list of local, state, and federal rules and laws, and those are regulations that change all the time. Most owners who violate a law do it unintentionally. It’s easy to make a costly mistake.
The legal liability that comes with investment properties is a great reason to hire a professional property manager. We know the laws, and we keep up with their changes. We can remove a lot of the liability and risk and keep your property protected.
If you have any additional questions about what you need to know as an investor, please contact us at Portola Property Management. We’d be happy to tell you more.