Investment properties are a great way to generate passive income while gaining equity that will bring you a big payday down the road. The process of purchasing an investment property differs from buying a property for yourself and your family. You must think beyond the pretty upgrades and nice backyard that may have drawn you to your home. Buying an investment property should be done from a more business-like point of view.
If you’re just getting started in the process of purchasing an investment property, here are six tips to get you thinking like an investor to help you purchase a property that will help you reach your financial goals:
- Choose a Location
Everything about buying an investment property needs to be done with intention. That includes choosing a location. Just because you love a specific neighborhood does not mean it will be a solid investment.
Before choosing a location, you’ll want to decide what type of investment property you are looking for. Will you be looking for long-term tenants, or are you hoping to get into the short-term vacation rental market? Is this a vacation home for yourself? The answer to that question will help you narrow down an area that will make the most sense for you economically and logistically.
- Run The Numbers
The goal of an investment property is to bring in additional income, so you can’t just blindly jump into any property that hits the market. You need to do the math.
You’ll want to look at how much the property will cost you monthly versus how much it will bring in. When running the numbers, don’t forget to factor in expenses like HOA fees and repair costs. Also, if you plan on having a property management company take care of the property, you’ll need to factor their fees in as well.
- Decide How You’ll Pay For Your Investment Property
You have the location figured out; now, how are you going to fund your investment property? Consider the risk versus reward of going all cash versus financing the property.
Many investors opt to take out a mortgage to purchase an investment home. If you want to go this route, it’s a good idea to keep up on mortgage rates and programs to help you get into a home with as little money out of pocket as possible.
You’ll have to have a down payment – there’s no such thing as a zero-down mortgage on an investment property, but you can get creative with where that money comes from. Many seasoned investors will also take equity out of an investment property to use as a down payment to get into another. This will allow you to build a real estate portfolio without draining your bank account.
- Get Familiar With Rental Laws
If you’re going to be a landlord, you need to get familiar with the Landlord-Tenant Act. Each state has different laws that need to be adhered to. It’s a good idea to familiarize yourself with these laws and know your rights before jumping in.
For example, different states place different requirements on how much you can charge a tenant for their security deposit. There may also be rules about where you can keep that money and how much needs to be returned to the tenant. It’s not as easy as telling the client they made a huge mess in your house, and you’re keeping their deposit to cover the cleaning costs. You should also look into fair housing laws as well as what to do if you have to evict a tenant.
Each state has specific requirements for various scenarios, and if you go about them the wrong way, the tenant could go after you. A lawsuit could cost you thousands of dollars, and you don’t want that. Seriously – familiarize yourself with these laws!
- Prepare For The Unexpected
Owning and managing investment properties is not for the weak at heart. Anything can happen, and you need to be prepared. It’s a good idea to save around 20% of the monthly rental income in case of an unexpected maintenance issue or emergency.
Emergency maintenance issues like a broken air conditioner need to be fixed immediately in a rental property, so having money to cover the costs is crucial. It’s also a good idea to have a list of reliable contractors in the area that you can call at a moment’s notice to help you out. If you need recommendations, we can help you out.
- Have An Expert On Your Side
Buying an investment property is a very big decision that should not be taken lightly. You’ll want to have an expert real estate agent on your side throughout the process. They will need to be familiar with the area and the current market conditions, and they should have experience working with investors.
Lucky for you, you already have this step taken care of. The LUXRE founders and several of our agents have years of experience working with investors directly. Give us a call to speak to a LUXRE agent in your area, and they will help you put together your real estate investment game plan and get the process started!