Buying investment property is one of the number one ways to build your personal net worth, get into the real estate game, and start a personal business without all the hassle of a store front and customers. Investment property, done well, is a great way to create a little mostly-passive income and connect with other locals who aren’t yet ready to buy their own home. Whether you’re looking to buy your very first rentvesting property to climb the real estate ladder to your dream house or you’re looking to expand your real estate assets to your first investment property, there are a few questions you should ask yourself before closing the deal on an investment property home. Most importantly, you need to understand the financial situation you’re getting into, be prepared for the responsibilities involved in being a landlord, and have a plan for how your investment property will remain financially self-supporting.
1. Are You Prepared for Higher Interest Rates?
Mortgage lenders have their own way of looking at things and weigh every lending decision based on what they see as a combination of risk and potential reward. The private calculations made by cautious lenders have indicated that owner-occupants are less risky than investment property, therefore investment property purchases tend to also come with higher mortgage interest rates. If you’re trying to do your financial calculations early, remember that most of the quoted rates are based on the assumption that you’re buying a residence to live in personally. Talk to lenders individually to get an accurate investment property interest rate before making any plans.
2. Do You Have a 20 Percent Downpayment?
While it is possible to get a mortgage with less than a 20% downpayment, it’s not advisable. The more downpayment you have ready, the lower your interest rate can go meaning a lower overall cost and lower monthly payments. If you’re going to do something as big as buy investment property, it’s worth your while to save up the full 20 percent in order to get a more sustainable mortgage.
3. Will the Rent Cover Mortgage and Some?
When choosing a specific home to buy, it’s vital that you calculate mortgage and expenses versus what you can reasonably charge for rent. Rent should be based on a combination of average rent in the neighborhood along with the size and quality of the home. Ideally, the amount you charge for rent will not only cover monthly mortgage payments. For the home to pay for itself, you also need to be able to put aside some extra rent money for regularly scheduled maintenance and the occasional necessary repairs.
4. Can You Rent ‘As Is’?
For your first investment property, do not choose a fixer-upper unless you are an expert home construction professional or know one who will work inexpensively for you. Look for nice quality homes well within your price range that can be rented ‘as is’ or with just a little cleaning. Whatever you do, don’t forget to hire an inspector to thoroughly examine the home and assure you that there are no lurking enormous repair bills in your future. Make sure to check on things like the HVAC and water heater to see if they will need replacing and calculate that into the costs.
Of course, being financially and strategically prepared to handle the house is only the beginning of finding the right investment property. Join us in the second half of this two-part series where we’ll cover how to ensure that the home you choose is appealing to the kind of renters you want. For more information about choosing an investment property and being a great landlord, contact us today!