Investing in real estate can be lucrative. Do it right, and you can reap the benefits of a reliable passive income, tax breaks, and equity gains. However, like any other investment, significant returns are not guaranteed. A wise investment property purchase requires careful consideration of the local market and rental demand.
If you’re considering purchasing your first rental property, there are a lot of things to consider. Whether you’re planning to buy a single-family longterm rental, a vacation rental, or any other type of real estate investment, it’s crucial that you arm yourself with as much information as possible. Here are five must-know tips for real estate investors looking to buying an investment property.
Location Is Everything For An Investment Property
A beautiful vacation home isn’t much use to vacationers if it’s located in a spot that isn’t frequented by tourists. Similarly, a five-bedroom home may not be the wisest property investment if it’s not located in a great school zone or area where house sharing is common.
When it comes to an investment property, regardless of how you plan to use to, the location should come first — even to the property itself in many cases. Put simply, the “right” property in the wrong location is not the right property.
Your Down Payment Matters
When purchasing an investment property, you should expect to put down a higher downpayment than you would if you were buying a family home. Typically loans for investment properties require a downpayment of at least 15% to 20%. In addition, investment properties have stricter financing requirements — and they don’t qualify for mortgage insurance.
How much you’ll need to put down will depend heavily on your lender, income, credit score, and debt-to-income ratio. Before you start hunting for the perfect investment property, you should speak to your lender and get an idea of how much you can afford, as well as an estimation of your potential closing costs.
The 1% Investment Property Rule
There are several formulas real estate investors use to determine whether a property will be a sound financial investment. One of the most popular calculations is the 1% rule. The 1% rule states that each month you should bring in a minimum of 1% of your investment costs. This includes the sale price and any such as repairs or renovations you make.
For instance, if you purchase an investment property for $200,000 and spend $20,000 making renovations, your total investment will equal $220,000. According to the 1% rule, you should generate returns of at least 1% of that total — $2200.
Of course, just because a property meets the 1% rule doesn’t mean it’s a good investment. It’s crucial that you research the local market and establish a clear idea of what renters want.
Consider Your Expenses
Like any other real estate, investment property has ongoing expenses. Both fixed and variable expenses can occur with investment properties. Fixed expenses include costs such as property taxes, homeowner’s insurance, property management expenses, HOA fees (if applicable), and general maintenance.
Variable expenses are often harder to budget for but include things like repair costs or special assessments. Although it’s almost possible to anticipate all expenses, it’s crucial to budget accordingly, so that you won’t be caught short.
Real estate rental can easily be a full-time job. If you choose to engage directly with your rental properties, you should expect to oversee all of the day-to-day operations. If you would rather adopt a more hands-off approach, you can pay a property management company to do the work for you.
Of course, hiring a property management service is an additional cost to consider. If your rental property is not within easy reach, or you’re simply too busy to take care of it personally, hiring a property management company may be more cost-effective. If you decide to hire a property management company, you should expect to pay around 10% of your rental income.
An investment property can be one of the most lucrative purchases that you ever make. Not only is it a tangible asset, unlike stocks and shares, but you can also earn a passive income from it as you build equity. If you’re considering buying an investment property, be sure to thoroughly evaluate all of your options to ensure that you make a sound financial decision.