Investment property is real estate purchased for the purpose of generating income. The intention is for the property to be rented out or used as a seasonal vacation home for other travelers, and in turn, create a reliable source of income. Buying your first rental property is an exciting prospect, however, it can also be immensely confusing and intimidating. Maintenance costs and stringent financing requirements are just a few of the challenges you might encounter while pursuing your first investment property.
When first starting out, it is advised to work with a real estate agent, particularly an agent who understands the investment side of real estate. The first step will be to begin analyzing potential properties; It’s often advised to find your first deal locally, or between an hour and two hours away from your current area. Work to find an area with a steady stream of renters, and figure out where people want to live. Where are property prices higher or lower? What are units typically rented out for? Is crime a consistent issue in the area? These are all vital questions that you will need to ask yourself before deciding on an area to invest in. Consulting with local real estate agents, property managers, and other local investors can be incredibly valuable when considering these propositions.
Begin to analyze potential properties, as many as you possibly can, in order to familiarize yourself and get comfortable with deal analysis. Try to research a few properties everyday until you find something you think is right for you. In a competitive market you will need to be fast and smart in the offers you propose. You will get offers rejected, consistently, investing in real estate is a numbers game, and you can expect to get 1 out of every 10 or even every 20 offers accepted. The goal is to make sure you’re always making offers on enough properties. It is recommended to aim to buy an investment property for 10% to 20% below the market. This will allow you to increase your net worth and financial security if you ever need to sell the property in a pinch.
Investment properties require a much higher level of financial stability than a typical family home would, especially if you plan to rent out to prospective tenants. You will need to be prepared to cover the initial home purchase costs like the down payment, inspection and closing costs as well as the ongoing maintenance and repairs that frequently accompany investment properties. When you do finally get a property under contract, you’ll be expected to pay earnest money, which is typically 1% of the purchase price. Earnest money essentially serves to ensure that you will not walk away and waste everyone else’s time and effort. This fee is refundable only if you buy the property as promised or back out due to a legitimist reason, like a disastrous inspection, uncovering unforeseen detriments.
Once you do close on a property, and have effectively budgeted more than you think you need for regular and emergency home repairs, it’s essential to estimate your annual rental income. Research similar units to find an average monthly rent. Commonly, what your charging for rent should amount to at least 1% of the total purchase price. You also need to calculate your net operating income – This equates to your annual rental estimate minus your annual operating expenses. Combine the cost of the everything you will pay while maintaining your property every year; like insurance, property taxes, maintenance and homeowner association fees. Do not include your mortgage or interest in your net operating income. Divide the net operating income by the total value of your mortgage to find your total return on investment (ROI).
When it comes to owning an investment property your budget involves more than how large of a mortgage you can afford. In addition to monthly mortgage payments, you will also have to budget for the ongoing costs of owning and renting out the property – utilities, maintenance, upkeep, and taxes will all weight against how much you realistically expect to collect in rent. Maintenance will likely be one of the most significant costs to consider when purchasing an investment property. You can choose to hire a property management company or handle things rent collection, repairs, and snow removal on your own. New investment property owners can expect to spend 1% of their property’s value each year on maintenance, but it varies depending on factors like the number of units, when the property was built and the conditions of major systems like plumbing and electric.
In addition to expenditures like taxes and homeowner insurance, you will also have to budget for marketing your property, background checks on prospective tenants, and utilities. You want to make sure that your property is adequately marketed to the right audience of renters, and be prepared to perform background checks to ensure that you are getting the highest quality of candidates. As far as utilities go, you will have a few options; you can either include them as part of the monthly rent, charge your tenant each month, or ask the tenant to sign up in their name and pay the utility companies themselves. It is also important for investment property owners to be familiar with rental laws that vary state-to-state, as well as be prepared for having to deal with delinquent tenants.
Purchasing an investment property is a big step for any investor, and more than likely will be one of the largest assets you can buy. With a little bit of time and effort, and a lot of research and due diligence, it can be a great way to generate passive income. The cornerstone of successfully buying and owning an investment property is to be prepared and knowledgeable of all the challenges and obstacles you may encounter along the way. Investing in real estate is certainly not for the faint of heart, however when done right it can be one of the most fruitful and rewarding financial decisions you ever made.