Things to Consider When Buying an Investment Property

 

Real estate can be a lucrative investment for someone, it has been known to produce wealth for many people. Before you decide to purchase your first investment property, there is some information that you need to know to ensure you get a solid investment.

Maintenance

Being a landlord means you should know your way around a toolbox. If something breaks in your rental property, your tenants will expect you to fix it promptly. You will also need spare cash for these repairs, so that is something to be considered.

You do have the option of calling someone to make any repairs you need, but that can get expensive fast. If you own several properties, it may be easier to have someone else do the repairs, but with only one or two properties, it is important that you are able to do the basic things.

Down Payment

An investment property often has a larger down payment than buying a house for yourself. Mortgage insurance tends to be unavailable for investment properties, so you will likely need to have the full down payment yourself. Without mortgage insurance, this means you will need at least 20 percent.

Fixer Uppers

It may be tempting to buy the cheaper house and just fixing it up yourself, but this is not always a good idea for an investment property. If you are not able to do the bigger changes to the home yourself, and you do not know someone who would be able to give you a lower rate, the improvements to the home can be expensive. Properties that only need some modest repairs are a better option, because they are generally not as expensive to fix.

Start Small

You might be tempted to buy a large apartment building, but if this is your first rental property, it is better if you start off with a single house, condo, or duplex. This will help you get your investment off the ground and let you determine if this is something you want to continue doing.

When it comes to the price of the property you are investing in, many experts suggest you should not spend more than $150,000 on it.

Choose Partners Carefully

If you cannot afford to buy the property by yourself and do not want to wait to purchase it, you may want to partner with someone who can help you buy it. This can be a great way to get things going for you, but it is important to be careful when you select your partners and the business agreement as a whole. It is a good idea to have a lawyer look at your agreement before finalizing everything.

Operating Expenses

According to Investopedia, the operating for the property “will be between 35 percent and 80 percent of your gross operating income.” They recommend you anticipate needing 50 percent of the income for operating expenses.

Maintenance

Paying for the routine maintenance of your investment property for things like fixing leaky faucets and repairing drywall can be costly. Adding in the bigger maintenance that will occasionally come up, and you are looking at what could be an expensive venture. Using the 50 percent rule will help you cover these costs when they come up.

Property Taxes

Property taxes are something every homeowner has to pay, but the property taxes for a rental property can be more expensive than those of a personal property. If you buy a property in a metropolitan area you can expect to have a higher property tax than if you buy property in a more rural area. Even if you really like the property, you need to remember this is a business investment, so if the taxes are higher than you are comfortable with, you should consider looking elsewhere.

Restoration

If the house you buy requires some restoration, you should factor that into your startup costs. Until you have made your restorations, you cannot rent out or resell the property, so it is important to factor those in. If you do not and need to wait on the funds to restore the house, your investment is just sitting there, not being the income source you had planned on it being.

Pay Your Debts

Before you buy your first investment property, you should try to clear all of your personal debts. Paying off your student loans, credit cards, vehicles, outstanding bills, etc. can help make it easier for you to secure a loan.