Many have heard that owning investment property is a great way to build wealth. There is truth to that statement; however, having investment property isn’t like trying a new food. One can’t just jump on the investment wagon and hope for the best. There are many factors to consider: return on investment, reserves, management, vacancy rates, maintenance—and of course whether one can afford the additional expenses are all factors that require consideration when buying investment property.
Below are some suggestions for things to explore when considering buying an investment property.
Talk with other investors: It’s important to ask people who are experienced with investment properties: How did they do it? Would they do it again? What would they do differently? What are their suggestions for considerations when looking at various market sectors?
Talk with a financial advisor: A conversation with a financial advisor should be among the first steps when considering the purchase of investment property. They have a keen understanding of one’s financial situation, financial goals and can be a guide to achieving those goals. A financial advisor will be able to help assess an investor’s asset base, tax advantages and consequences. We’re talking about an investment of hundreds of thousands of dollars, so it’s vital that there’s a clear understanding of what the goal for the investment property is in long-term financial planning.
Research the ever-changing market in the target investment area: Real estate markets differ from city to city. It’s important to talk with a Realtor who has detailed knowledge and experience with rental markets in the area, ROI calculations and considerations, high performing rental types and landlord-tenant law. Landlord-tenant law is key when looking to purchase investment properties, particularly when trying to understand rent increases and market rents.
Research management companies: Interview property management companies in the area about the costs involved in having a rental property. What are the fees and costs associated with the management of rental properties? What is the average vacancy rate for the rental market in the area? What are additional costs of owning rental property? For example, does the tenant or property owner pay for utilities, landscaping and repairs? What are the responsibilities as an owner versus a property management company?
Speak with a lender about the requirements to buy investment property: Investment property loans require much larger down payments than a mortgage for an owner-occupied property. The typical down payment required is 30% of the purchase price and has different requirements when it comes to a loan. It’s important to speak with a lender to gain an understanding about loan options, lender requirements for investment property—and most importantly, if one can qualify to buy rental properties.
A local real estate professional is one of the best resources one can have in terms of helping to guide a potential investor through the suggestions above. Utilize their expertise and resources to help gather information when considering purchasing investment property.