An investment property is one of the largest assets you can purchase, and it’s a big step in building or growing an investment portfolio. However, while it can earn a steady stream of income, it also comes with its challenges. That’s why it’s essential to have a grasp of the basics before you dive into buying that property down the street. Below, you will find information and advice to help you as you start your investment property journey.
Determining Whether It’s Right for You
First of all, you need to think long and hard about whether you should buy an investment property. After all, it might be the biggest single financial outlay you ever make.
Start by looking at the advantages. For example, Redfin notes that owning an investment property can generate a steady stream of income, it’s a sustainable business model, and there are typically few barriers to entry. Yet there are also drawbacks to consider. Oftentimes, you need significant cash flow to invest in a property, you’re responsible for repairs and maintenance, and you have to be able to effectively market the property.
Moreover, make sure you are ready to be a landlord. Tenants are a game changer. When you have a good tenant, life is good and the money rolls in. When you have a bad tenant, it might make you wonder why you ever bought that investment property to begin with.
Looking for a Good Property
Like with tenants, the property itself can make or break your investment. For the sake of starting out strong, try to find a property that doesn’t require expensive repairs. So, for the first-time buyers out there: no fixer-uppers! If you can find a property that requires 1% or less of the home’s value in repairs, you’re on the right track.
You can begin your search online. If you’re looking for commercial properties, keep in mind you can begin your search with a website like Enriched RealEstate, which caters to buying and selling commercial property. On the other hand, traditional homes, duplexes, vacation rentals and so forth can be researched through sites like Redfin.
You need to consider any amenities you will include as well. For instance, guests will expect fast WiFi. So, plan to set up 5G internet, which is really fast and can reach all corners of the home. You also might want to think about things like a pet policy and some security measures.
Furthermore, make sure you know what to charge for rent. When starting out, a good rule of thumb is to charge 1% of the property’s value. For example, if you buy a property for $120,000, you would charge $1,200 per month for rent. This may not work down to a science, but it’s a good starting point.
Down Payment and Credit Score
When purchasing an investment property, it’s important to know what you’re getting into as far as the financing process goes. MillionAcres explains that you will need a credit score of at least 640 to purchase a single-unit property with a fixed-rate mortgage, which will require a 20% down payment. With a credit score of 720 or above, you will only need a 15% down payment. And if you go with an adjustable-rate mortgage, you can opt for a 15% down payment on a single-unit property as long as your credit score is at least 620.
Managing the Property
Finally, once you’ve purchased your investment property, you will need to keep it in tip-top shape. This includes everything from major and minor repairs to landscaping to deep cleaning. After all, no one wants to stay at a home that hasn’t been well-maintained, and you have a responsibility to keep the property livable.
Since so much work is involved, many landlords choose to hire a property management company to handle all of the repairs, maintenance, and tenant relations. However, this will cut into your profits, so it’s important to weigh your options before deciding whether to hire someone or do it yourself.
Purchasing an investment property can turn out to be a great experience that leads to building your wealth. Just make sure you do your research and come at it with the right approach. Knowing what you’re getting into will help you prepare appropriately and make decisions that equate to positive outcomes, rather than financial misadventures.