Buying an investment property is a big step, and making money on the property takes market savvy, good timing, and a sound strategy. This guide covers the things you need to consider before you invest.
The National Association of Realtors (NAR) published a study citing that existing single-family home values have increased by 90% in most metro areas over the last three years. The statistics are great news for those who already own an investment property, but can seem a little daunting to those starting their first property search.
The low inventory of properties for sale can make it hard to find the right property that will allow you to make a solid return on your investment. It can seem counter-intuitive to buy when the market is high, but there is no reason to think that the housing market will cool anytime soon.
Reasons to buy now
Interest rates remain at near historic lows, but this is changing. The interest rates will eventually rebound, and the opportunity to lock in a loan at these low rates will be gone.If your financial status can allow you to purchase at a reasonable rate, make necessary repairs and then rent out your property for enough to cover the mortgage payment, insurance, and taxes, then it is a solid investment. If you can rent the property for more than the cost of your mortgage, insurance, and taxes, then you create passive income. Invest that passive income into a long-term investment strategy and you can see the power of accumulating returns over time.
If you are savvy about cosmetic repairs, you can buy outdated properties that only need cosmetic fixes and see a significant return on your investment. Many people lack the vision or patience to see a property in an established or up and coming neighborhood and envision what it can be with cosmetic changes such as paint, flooring, fixtures, and countertops.
Things to consider before you buy
Take a realistic look at your overall financial health and your financial goals. How much of your savings will you be investing in a property, and do you have the resources to take a hit if repairs cost more than expected? There are almost always unexpected bumps in buying and refurbishing investment properties. You need a solid plan for how an investment property fits into your long-term financial goals.- Being a landlord brings a unique set of challenges and can take more of your free time than expected. Are you handy with fixing things yourself, or will you be dependent on hiring contractors for any issues that arise? Do you enjoy working on things? If you will be using contractors for all major or minor repairs, this can quickly eat into potential earnings.
- Do your research regarding property taxes before you buy. As an investment buyer, you will not have access to things like homestead exemptions and other property tax breaks that homebuyers who reside in their homes might have.
- Consider starting small if you are new to investment property. Even if you have the resources to buy a larger property, consider purchasing a smaller and less expensive property as your first investment. Starting small allows you to learn the ropes without risking overextending yourself.
- Choose your tenants wisely. Do a background check on any potential tenants, and require a significant security deposit. Tenants can do extensive damage to property by not informing you of maintenance issues or by neglecting their responsibilities. While insurance can offer some protection, you can still be left with significant repair costs. You also have to factor in the laws of your state regarding removing a tenant who breaches a rental contract. Legal fees for moving forward with an eviction can mount up quickly.
