For many, the opportunity to buy an investment property is a potential way to generate income. You can use these homes as rentals, Airbnb’s, and even a jumping-off point for building your own investment property empire.
For first-timers, getting an investment property might sound pretty attractive; but there are things you need to consider before you get started.
Here’s what you’ll want to think about before you buy an investment property.
The very first thing you need to examine is if you’re ready, both financially and mentally.
Spend any time watching your favorite home and gardening channel, and you’ll see there’s a lot of fun having an investment property, but there’s a ton of work too. So you need to think about your readiness to take this sort of project on.
Check your finances
First, look at your finances. When you own any home, investment property, or not, you need to have your finances in order. You’ll need funds for a down payment, closing costs, and your monthly mortgage payment, plus operating expenses covering your property taxes, insurance, and maintenance.
Many people think they won’t be able to buy without funds for a 20% down payment. But that’s not always the case. You can buy a home without a 20% down payment. You might have to pay what’s called private mortgage insurance (PMI) which is a type of insurance some lenders use to help lower their risk. You pay this on top of your monthly mortgage payment until you’ve hit enough principal that you don’t need it. If you can afford this extra payment every month, then it might make sense for you.
Another option is looking at government loan programs. For example, there are Federal Housing Administration (FHA) and Veterans Affairs (VA) loans aimed toward buyers that have no or very low down payment requirements.
There’s also the option of using rental income to help pay for your monthly mortgage too. Here, there are a few ‘hacks’ you can consider. One option is to buy a multi-family home, anywhere from a duplex to a fourplex, would be an example, live in one unit and rent out the rest. You could also rent out your current home and knowing you’ll have that steady income, purchase a new investment property.
Know what’s involved
Next, spend time learning about the ins and outs of investment properties and what’s involved. A big part of that is determining if a property is something that is going to make a good investment.
Unlike buying a residential home, many investment property owners want to ensure they get a return on their investment, not just break even. As you look at the properties you’re considering, do the math to see if it can provide returns.
Beyond the financial side, realize that buying an investment property can take a lot of time and mental energy as well. Once you become a landlord, you’re responsible for the property and are the first person your tenants will call if they run into any issues.
Remember that when it comes to property ownership, the unexpected does arise. Be prepared for costs relating to upkeep and repairs. Even if you think you’re bringing in extra income each month, it’s very possible those funds could end up going to maintenance or potentially property manager costs.
For example, if you’re getting $1,100 a month on a $1,000 mortgage, those funds might already be earmarked for other expenses. Keep your potential return on investment in mind as you calculate not only your potential rental income but also all the associated costs and fees you’ll need to cover each month.
Consider your free time
A big part of buying an investment property goes beyond fixing up the home and getting it ready for occupancy. You’ll need to mentally prepare to be a landlord.
As a landlord, be prepared to deal with any potential repairs and other maintenance issues, find tenants, and collect rental income from them. This adds up to a lot of work, especially if you already have another full-time job. You’ll need to consider if you have the available time to be on call to fix a burst pipe or shovel a walkway after a snowstorm.
One solution a lot of landlords turn to is hiring property managers. These agencies or individuals take care of all your maintenance and upkeep work, as well as helping you screen tenants and collect rent.
Here are some of the things a property manager can take off your plate:
- Advertising your property is for rent
- Screening potential tenants
- Handling all leasing agreements and ensuring enforcement
- Collecting rent
- Taking care of maintenance and repairs
It shouldn’t be a big surprise that property managers require a fee for their work, so it’s another cost you’ll want to factor in as you explore your options. These fees can be set as a flat rate per month or calculated as a small percentage of the monthly rent, depending on the property manager.
If you’re considering hiring a property manager, here are a few pros and cons to think about.
Pros of hiring a property manager:
- If you’re growing your portfolio and don’t have a lot of free time, property managers can handle the vast majority (if not all) of the management and maintenance for you.
- Property managers have local marketing expertise and can tap into this skill set to fill vacancies quickly.
- Property managers should also have a grasp of the market so will know where to set rates, removing the guesswork.
- Many property managers will have a local network of agents and repairmen who they can contact for work, usually at competitive rates.
Cons of hiring a property manager:
- Property managers charge a fee for their services, so that’s another expense you’ll have to factor into your budget and ROI calculations.
- Some investors might not like giving up much of the control and day-to-day management of the property to someone else.
- You might find you’re not on the same page as the property manager when it comes to the tenant screening process.
If you are thinking about hiring a property manager, it’s important to take the time to pick a good one. Here are a few ways you can vet potential applicants:
- Check their reviews: A quick online search or viewing review sites can help you see how property managers in your area are rated by actual users.
- Talk to other investors: Never underestimate the power of your network. Chat with other investors you know and see who comes up in their recommendations.
- Ask about the screening process: See how the property manager approaches the tenant screening and application process so you can ensure you’re on the same page.
- Experience with your type of property: Ideally, you’ll want to work with a property manager who has experience in managing properties similar to yours.
For many investors, having a property manager or even a repair person ready and on-call is a huge timesaver. But you want to know how the process works and the pros and cons before you jump in and hire one.
Investment Property Starter Kit
Buying a property is not all that different from buying a typical residential home.
Here are a few steps to take to help you walk through the process.
- Run the numbers: The most important part of buying any investment property is making sure you know your numbers. Do the math before you get started.
- Set your budget: Know how much you can afford to spend each month, and what you have for your down payment. Don’t forget the fees for insurance, upkeep, and operating costs.
- Determine financing: Some buyers pay in cash, while others prefer getting a mortgage. Whichever method you choose, ensure you have the cash on hand or pre-qualify before you start.
- Pick a location: Location matters with investment properties, especially rentals. You can charge more in rent each month for a great spot, which could improve your investment.
- Know your legal obligations: Once you’ve decided to buy, you’re officially a landlord. You need to ensure you are operating within the law, so speak with a legal professional about the next steps.
If you to take the plunge and buy an investment property, get it fixed up and ready to go to prepare for tenants.
Deciding to buy an investment property is a big decision, but once you understand more of what goes into it, you can run the numbers and make the right choice for you.
If you need help or have any questions along the way, reach out. OVM is here for you throughout the loan process, regardless if you’re buying property as an investment or for a primary residence. Get in touch today to speak with one of our loan officers.
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