Buying an Investment Property
Low interest rates and improvements in wealth accumulation have sparked a renewed interest in buying investment properties. Investing in the right real estate can be an excellent way to diversify your investment portfolio. Buying an investment property requires you to have an accurate snapshot of your personal finances. It also requires you to research your purchase well and have a team of other competent professionals to help you.
Identify your goals
One of the most important steps in buying an investment property is deciding what your relationship to the property will be as an owner. The two basic relationships owners have to their investment properties are long-term ownership (income from renting) and short-term ownership (repair and gain income from selling). Both come with their own set of decisions that have to be made.
What’s in your wallet?
One of the most important things you can do before buying an investment property is to take a long, hard look at your personal finances. Several financial rules-of-thumb are:
- No bankruptcies and foreclosures within the past seven years.
- Other rental properties have to be documented by at least two years’ tax returns.
- You have to have money in a bank account equal to six months’ mortgage payments for every investment property that you own.
- If you already have four financed properties, you have to make a 25 percent down payment and have a credit score of at least 720.
Consider collateral expenses
Some of the costs that you must consider when establishing your rental purchase price and rental fees include:
- Mortgage rates: The rate is most favorable if you have a down payment of 25 percent or more and if your credit rating is 720 or higher. Generally speaking, mortgages on duplexes, triplexes, and quadriplexes have higher interest rates, and commercial properties have the highest interest rates.
- Rates for fixed-rate mortgages and adjustable-rate mortgages (ARMs) may be close enough for you to choose a fixed rate. The term of your mortgage is also important: The shorter the term, the higher your monthly payments will be.
- Insurance costs, which are typically higher than those for owner occupied residences.
- Taxes: More favorable if a property is owner-occupied.
- Vacancy costs, which can be 8 to 10 percent.
- Maintenance costs, which are determined by the size (single home vs. duplex or apartments), type, and location.
- Tenant turnover expenses: It costs to make repairs, paint walls, replace worn out carpets, polish floors, and advertise for new tenants.
Make use of public & online resources
Public records and online resources will help you gain insight into a property’s value based on its location and features. You can find many great investment property calculators that can give you a better understanding of the potential long-term costs and income associated with your investment property.
Get helpers who have the right stuff
Make sure you select a real estate agent and a lawyer who are seasoned in the area of investment purchases. Having a reliable contractor will help to ensure that repairs are affordable. Compare mortgage quotes from more than one lender to get the best deal.