It can be a very wise decision to purchase an investment property. If done correctly, you will earn passive income, receive tax breaks, and gain equity. Nevertheless, it is not sure you will make a significant return on your investment, so you need to consider both market trends and general guidelines when choosing and purchasing your investment property.
It’s perfectly normal to feel overwhelmed when purchasing investment properties for the first time. Whatever type of real estate investment you are looking for, a vacation rental, a condo in the city, a commercial property, or something else, you need a clear head and understanding of what to look for before investing.
To help you, we’ve put together this quick guide on what you need to consider when buying an investment property. Even though each situation needs to be evaluated on its own, these considerations are an excellent starting point for your investment decision.
Consider the location of your investment property
If your vacation home is located somewhere people rarely visit, you won’t attract vacationers. Furthermore, a fixer-upper might be a good choice in Seattle, where competition is high, but in a less competitive market, you might wind up at a loss. So first, think about location, then think about the property. Finally, you want to make sure you buy the right property in the ideal place to support your goals.
Know the differences in down payments
If you’re buying an investment property, your down payment requirements are different from when you’re buying a home for your family. A down payment of at least 20% is required to secure financing for investment properties since mortgage insurance is not available on them.
Your credit score, income, and debt-to-income ratio (DTI) will determine how much down payment you will be expected to make. Whenever you buy a real estate property, know what is and isn’t feasible before going on a property search.
Consider the 1% Rule
Those interested in real estate investments use the 1% rule to decide whether investing in a specific property is worth it. Aim to bring in no less than 1% of each month’s purchase price. That includes the purchase price plus any additional money you spend on repairs or renovations.
Assess your expenses
An investment property is not a one-time purchase. Every property you own entails expenses, both fixed and variable. Even though it’s not always possible to anticipate these costs accurately, you’ll need to budget appropriately to account for them. Fixed expenses you should include are:
- Taxes on properties
- Insurance
- HOA fees
- General property maintenance
Budget for variable expenses, such as replacing a water heater or fixing a roof after a storm, but make sure you leave some wiggle room for unexpected repair costs.
Understand the risks
The purchase of an investment property does come with some risks, as with everything in real estate. Understanding these risks is essential.
Some of the most significant risks include:
- Local market economies may change.
- The rental interest you anticipate might not materialize.
- There could be an increase in property taxes.
- Regular repairs could end up being costly.
- A bad tenant could result in unexpected repair costs or even eviction costs.
Avoid focusing solely on risks, but don’t ignore them either. Of course, any investment is never a guarantee, but you should be prepared if something goes wrong and that you have some flexibility built into your financial plan.
Consider property management
How involved do you want to be with the day-to-day management of your investment property? Real estate investors may choose to serve as a landlord or otherwise be actively involved in day-to-day operations, while others hire a management company, like Sound Point Property Management, to handle those duties. You can decide how involved you would like to be and whether you want to add expenses involved in hiring a property management firm.
Though hiring a property management service is an expense, it’s not necessarily more costly than doing things on your own. You might end up saving money. Research each option and keep these expenses in mind when deciding whether to purchase a particular property.
One of the best investments you can make is purchasing an investment property. Be sure to use a knowledgeable advisor who can assist you in navigating the process and making the best purchase. Make sure that you carefully consider all of the factors above to make sure the investment you make is wise.
Sound Point Property Management is here to help you make the most of your investment. Contact us today.
