5 things to know about buying an investment property
Investing in real estate is one of the most common ways to build wealth and long-term financial independence. While there are plenty of people who have gotten rich flipping or renting houses, the reality is far riskier. The following are five things that every person should know about buying an investment property.
1. Think with your head – not your heart
House hunting for a primary residence is driven by emotions: how a home feels, what design features we prefer, or imagining our families living there. When choosing an investment property, however, it’s important to take emotion out of the equation. This is not a place you’ll be living with your family for many years; it is an investment that will either be rented or renovated and sold. Make smart, logical decisions about price, neighborhood, and even design finishes to maximize your return on investment.
2. Avoid a flip to prevent a flop
HGTV shows like Fixer Upper have many potential investors convinced they can quickly and easily flip a house for a major profit. Unfortunately, many flips turn into flops, with investors losing thousands of dollars due to unforeseen renovation costs. Instead, look for a home that needs very minor repairs or updates that can be completed quickly.
3. Secure your financing
The rules for mortgages and investment properties are significantly different than those for primary residences. In addition to qualifying for different terms and conditions, many lenders require mortgages for investment properties to have higher down payments. To ensure you are getting the best loan possible, consider working with a mortgage broker to help find the right loan for your investment.
4. Calculate your expenses and earnings
Considering every detail beforehand can help potential investors avoid pitfalls – or getting in over their heads. Calculate earnings as well as expenses beforehand. Check local listings for comparable properties to find out how much you can expect to bring in for rent. Expect about 50% of the income generated to cover expenses – not including the loan. Fixed expenses include property taxes, HOA fees, and insurance; variable expenses are unplanned issues such as plumbing problems or replacing appliances.
5. Select a low-cost first property
Even if you have one million dollars to invest, consider starting with a low-cost property. Most experts agree that your first investment should cost no more than $150,000; starting with a low-to-mid range property can help investors stay in their “safe zone”; even if you don’t meet your expected profits, there’s lower risk of losing everything.
by Author, August. 27, 2019